November 19, 2007 SEC Approves Rule 2290 - Fairness Opinion Conflicts of Interest
The SEC recently approved Rule 2290, requiring specific disclosures in fairness opinions provided by investment banks. Originally proposed in 2005, the Rule attempts to address concerns regarding the conflict of interest that exists when an investment bank provides advisory services on a deal, generally with significant compensation tied to the deal's closing, and also opines that the deal is fair.
September 19, 2006 Conflicts of Interest
The conflicts of interest that pervade fairness opinions is one of today's hottest corporate issues. The M&A community is abuzz about the conflicts of interest that exist when an investment bank providing advisory services on a deal, generally with significant compensation tied to the deal's closing, also opines that the deal is "fair." Many view fairness opinion conflicts akin to investment banking conflicts which resulted in separation between equity research and investment banking departments and accounting conflicts which resulted in separation between audit and non-audit functions. Others consider fairness opinions to be under the same microscope as executive compensation. Meanwhile, boards of directors are demanding more fairness opinions than ever before. Simply put, the entire M&A world is bracing for a court ruling that could change the way deals are done. Could investment banks be forced to divest their fairness opinion practices? Might the M&A market be slowed by a change in board liability, state regulation, or anything in between? While no one can predict where the dust will settle, the end result will impact how deals are done and where liability falls.
While the practice of providing advisory services on a transaction and opining to its fairness has long been the industry standard, it has so far evaded strict regulation and has remained a practice allowed with disclosure. Part of the reason for the softer stance on such an apparent conflict, may well be the availability of such obvious targets as the insurance industry, tax shelters and mutual fund scandals, which have held the focus and attention of the New York Attorney General. In addition, the M&A market endured a significant decline in 2002 and 2003, leaving fewer transactions and less shareholder concern. However, the resurgence of the M&A market in the
past two years, the Sarbanes Oxley regulatory climate, and new FASB rules on accounting for transactions have raised the stakes for management, shareholders and board members.
