February 2005                                        Click here for the .pdf version of this document

MPI’s experience and independence addresses concerns

Recently, the NASD initiated an inquiry into the procurement, fees, methods and potential conflicts of interest associated with fairness opinions. In addition to conflicts of interest, the inquiry is focused on the following issues related to the use of fairness opinions:

• Lack of independence;

• Contingency fees;

• Due diligence procedures and valuation methodology employed in rendering fairness opinions.

As a result of this inquiry, the NASD issued a notice in November 2004 to NASD members requesting comment on a proposed rule that would address the aforementioned procedures, disclosure requirements and conflicts of interest when members provide fairness opinions in corporate control transactions. Specifically, the proposed rule would require members to: 1) disclose in any fairness opinion appearing in any proxy statement any significant conflicts of interest, including, if applicable, that the member has served as an advisor on the transaction in question, and the nature of compensation that the member will receive upon the successful completion of the transaction; and 2) require specific procedures that members must follow to identify and disclose potential conflicts of interest in rendering fairness opinions¹.

The call for change appears to be growing.  Two recent articles² in The Wall Street Journal suggest that the SEC could be apt to address perceived abuses associated with fairness opinions, particularly with respect to conflict of interest issues, as part of a broader investigation of potential conflicts of interest on Wall Street. A third article³ in the same publication describes proposals by Calpers and the investment arm of the AFL-CIO to bar investment banks from providing fairness opinions on transactions in which they act as principal advisor.

The NASD’s and SEC’s current focus on fairness opinions and potential conflicts of interest indicate that increased disclosure or regulation is a likely outcome. Because of these developments, it may be prudent for those that procure fairness opinions to evaluate the independence and objectivity of those firms preparing such opinions.

For 65 years Management Planning, Inc. has provided independent and objective opinions of fairness, solvency and valuation. Our highly regarded staff includes experienced valuation and investment banking professionals known for compliance with USPAP’s required standards of independence and objectivity.

¹  NASD Notice to Members 04-83, November 2004, Page 1010.
²  June 11, 2004 and December 29, 2004.
³  February 8, 2005

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