NASD Rule 2290
Disclosures and Procedures Concerning the
Issuance of Fairness Opinions
Rick Lacher
Houlihan Lokey Howard & Zukin
Investment Banking Services
200 Crescent Court, Suite 1900
Dallas, TX 75201
Phone: (214) 220-8490
rlacher@hlhz.com
October 21, 2006
HOULIHAN LOKEY HOWARD & ZUKIN
NASD Rule 2290
Timeline and Status
 The NASD proposed Rule 2290 on June 24, 2005.
 The NASD filed amendments with the SEC on November 30, 2005, January 25, 2006,
and March 1, 2006.
 The SEC solicited comments from interested persons on April 4, 2006.
 On August 24, 2006, the time period for SEC action was extended to November 1. It is
not clear whether to expect Commission action by that date or merely another extension.
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HOULIHAN LOKEY HOWARD & ZUKIN
NASD Rule 2290
Disclosures
Any NASD member issuing a fairness opinion that may be provided, or described, or otherwise referenced
to public shareholders must disclose, to the extent not otherwise required, in such fairness opinion:

whether such member has acted as a financial advisor to any transaction that is the subject of the
fairness opinion, and, if applicable, that it will receive compensation for:

rendering the fairness opinion that is contingent upon the successful completion of the transaction;

serving as an advisor that is contingent upon the successful completion of the transaction;

whether such member will receive any other payment or compensation contingent upon the successful
completion of the transaction;

whether there is any material relationship that existed during the past two years or is mutually
understood to be contemplated in which any compensation was received or is intended to be received
as a result of the relationship between the member and the companies that are involved in the
transaction that is the subject of the fairness opinion;

the categories of information that formed a substantial basis for the fairness opinion that was supplied
to the member by the company requesting the opinion concerning the companies involved in the
transaction and whether any such information in each such category has been independently verified by
the member; and

whether the fairness opinion was approved or issued by a fairness committee.
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HOULIHAN LOKEY HOWARD & ZUKIN
NASD Rule 2290
Procedures
Any member issuing a fairness opinion must have procedures that address the process by which a fairness
opinion is approved by a firm, including:

the types of transactions and the circumstances in which the member will use a fairness committee to
approve or issue a fairness opinion, and in such transactions where it uses a fairness committee:

the process for selecting personnel to be on the fairness committee;

the necessary qualifications of persons serving on the fairness committee; and

the process to promote a balanced review by the fairness committee, including review and approval
by persons who do not serve on or advise the “deal team” to the transaction;

the process to determine whether the valuation analyses used in the fairness opinion are appropriate,
and the procedures should state the extent to which the appropriateness of the use of such valuation
analyses is determined by the type of company or transaction that is the subject of the fairness opinion;
and

the process to evaluate whether the amount and nature of the compensation from the transaction
underlying the fairness opinion benefiting any individual officers, directors or employees, or class of
such persons, relative to the benefits to shareholders of the company, is a factor in reaching a fairness
determination.
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HOULIHAN LOKEY HOWARD & ZUKIN
NASD Rule 2290
SEC’s Solicitation of Comments
In the SEC’s Request for Comment, the SEC specifically notes:
 The proposed Rule does not require member firms to quantify the amount of contingent
fees that will be earned from either the client or others in the transaction. The SEC asks if
such quantification should be required.
 The proposed Rule requires that a firm state if compensation is contingent. The SEC asks
whether in the disclosure it should be stated that a conflict may exist and a description of
the impact of such conflict be included.
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HOULIHAN LOKEY HOWARD & ZUKIN
NASD Rule 2290
Summary of Responses to SEC
There were fewer responses than in the NASD’s original request:
 The Council on Institutional Investors was the only “investor” to respond. It supported the
NASD rule and any expansion of disclosure that the SEC, or others who could impact
policy (such as the NYSE and other exchanges), could require.
 The Wall Street banking community (through the Securities Industry Association) again
responded with a desire for the status quo and to curtail any detailed disclosure of the size
of contingent fees relative to the size of the fairness opinion fee.
 The NY State Bar and the City Bar of NY again aided the investment banking community
with more harshly worded responses that support the NASD rule AS IS (but without
increased disclosure requirements) and argue for limitations. The NY Bar even suggests
that along with the disclosure of a contingent fee relationship should be an
acknowledgement that such relationship does NOT create a conflict of interest.
 Generally, the investment banks believe that the evaluation of compensation is not within
the members’ role as financial advisor or fairness opinion provider.
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HOULIHAN LOKEY HOWARD & ZUKIN
NASD Rule 2290
Observations of Change
 The SEC has generally increased its disclosure requirements regarding potential conflicts
of interest (including in Risk Factors).
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