Self-Regulatory Organizations; National Association of Securities Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.); Notice of Filing of Amendment No. 4 and Order Granting Accelerated Approval of Proposed Rule Change as Modified by Amendment Nos. 1, 2, 3 and 4 Relating to Fairness Opinions, 59317-59321 [E7-20585]
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Federal Register / Vol. 72, No. 202 / Friday, October 19, 2007 / Notices
to confirm how institutional brokers
should handle stop and stop-limit
orders.3 Under these provisions, an
institutional broker could choose to, but
would not be required to, accept stop or
stop-limit orders.
Under this proposal, a stop order to
buy (sell) would become a market order
when a transaction in the security at or
above (below) the stop price is reported
in an effective transaction reporting
plan after the order is received by an
institutional broker. Similarly, stoplimit orders to buy (sell) would become
limit orders when a transaction in the
security at or above (below) the stop
price is reported in an effective
transaction reporting plan after the
order is received by an institutional
broker. Stop or stop-limit orders could
be elected either by the price of the
opening transaction on the Exchange or
by the price of the opening on any other
market center reporting in an effective
transaction reporting plan. These
proposed provisions are substantially
similar to requirements set forth in the
rules of other self-regulatory
organizations, including New York
Stock Exchange LLC (‘‘NYSE’’) and the
Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) (f/k/a
National Association of Securities
Dealers, Inc. (‘‘NASD’’)).4
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act 5 in general, and
furthers the objectives of Section 6(b)(5)
of the Act.6 The proposed rule change
is consistent with Section 6(b)(5) of the
Act because it would promote just and
equitable principles of trade, remove
impediments to and perfect the
mechanism of, a free and open market
and a national market system, and, in
general, protect investors and the public
interest by permitting the Exchange to
add a new provision to its institutional
broker rules to confirm how
institutional brokers should handle stop
and stop-limit orders.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
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The Exchange does not believe that
the proposed rule change will impose
any burden on competition.
3 Other provisions of the institutional broker rules
confirm the order-handling obligations associated
with market, limit, and not held orders.
4 See NYSE Rule 13; NASD Rule 5120(h).
5 15 U.S.C. 78f(b).
6 15 U.S.C. 78f(b)(5).
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments on the proposed
rule change were neither solicited nor
received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission will:
(A) By order approve such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CHX–2007–09 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CHX–2007–09. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
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those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of such filing also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–CHX–2007–09 and should
be submitted on or before November 9,
2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.7
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–20586 Filed 10–18–07; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56645; File No. SR–NASD–
2005–080]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc. (n/k/a Financial Industry
Regulatory Authority, Inc.); Notice of
Filing of Amendment No. 4 and Order
Granting Accelerated Approval of
Proposed Rule Change as Modified by
Amendment Nos. 1, 2, 3 and 4 Relating
to Fairness Opinions
October 11, 2007
I. Introduction
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’ or ‘‘Act’’),1 and Rule
19b–4 thereunder,2 on June 22, 2005,
the National Association of Securities
Dealers, Inc. (n/k/a Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)),
filed with the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change relating to fairness
opinion disclosures and procedures.
On April 4, 2006, the Commission
issued a release noticing the proposed
rule change, as modified by Amendment
Nos. 1, 2, and 3, which was published
for comment in the Federal Register on
7 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 72, No. 202 / Friday, October 19, 2007 / Notices
April 11, 2006.3 The comment period
expired on May 2, 2006. The
Commission received eight comment
letters in response to the proposed rule
change.4 On June 7, 2007, FINRA filed
Amendment No. 4 to the proposed rule
change. This order provides notice of
the proposed rule change, as modified
by Amendment No. 4, and approves the
proposed rule change as amended on an
accelerated basis.
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II. Background
FINRA is proposing to establish new
Rule 2290 to address disclosures and
procedures in connection with the
issuance of fairness opinions by member
firms. Fairness opinions are routinely
obtained by boards of directors in
corporate control transactions and
address the fairness, from a financial
perspective, of the consideration being
offered in the transaction.
Fairness opinions may serve a variety
of purposes, including as indicia of the
exercise of care by the board of directors
in a corporate control transaction as
well as to supplement information
available to shareholders and, as such,
are often provided as part of proxy
materials. Fairness opinions offer a view
as to whether the consideration offered
in a deal is within the range of what
would be considered ‘‘fair,’’ rather than
offering an opinion as to whether the
consideration offered is the best price
that could likely be attained.
In its proposal, FINRA expressed
concern that the disclosures provided in
fairness opinions may not be adequate
to alert shareholders as to potential
conflicts of interest that may exist
between the firm issuing the opinion
and the parties involved in the
transaction. For example, in many cases,
the firm issuing the fairness opinion is
also acting as an advisor to a party to the
transaction. As such, there may be a
contingent compensation structure
3 See Securities Exchange Act Release No. 53598
(April 4, 2006), 71 FR 18395 (April 11, 2006)
(‘‘Original Proposal’’).
4 See Letters to Jonathan G. Katz, Secretary,
Commission, from: Michael W. Kane, Ph.D., J.D.,
President and CEO, Kane & Company, Inc. (May 1,
2006); Donna M. Hitscherich, Faculty, Columbia
University Graduate School of Business, New York
(May 1, 2006); Gilbert E. Matthews, CFA, Chairman,
Sutter Securities Incorporated (May 1, 2006); Ann
Yerger, Executive Director, Council of Institutional
Investors (May 1, 2006); John Faulkner, Chair,
Capital Markets Committee, Securities Industry
Association (May 2, 2006); Marjorie Bowen,
Managing Director, National Co-Director of Fairness
Opinion Practice, Houlihan Lokey Howard & Zukin
Capital, Inc. (May 2, 2006); Daniel S. Sternberg,
Committee Chair, Special Committee on Mergers,
Acquisitions and Corporate Control Contests, The
Association of the Bar of the City of New York (May
3, 2006); Michael J. Holiday, Chair, Committee on
Securities Regulation, New York State Bar
Association (May 11, 2006).
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dependent upon the success of the deal.
There may also be other material
relationships between the member firm
and a party to the transaction that is the
subject of the fairness opinion involving
compensation that has been, or is
intended to be, received. Thus, the
proposed rule change would provide
shareholders with certain disclosures
with regard to any fairness opinion
issued by a member firm if, at the time
of its issuance to the board of directors,
the member knows or has reason to
know that the fairness opinion will be
provided or described to the company’s
public shareholders.
Further, the proposed rule change
seeks to require member firms to
establish written procedures for use in
issuing fairness opinions, including
addressing when a member firm will
employ the use of an internal committee
in approving a fairness opinion. In cases
where a committee is used, the member
must set forth in its procedures, among
other things, the process for selecting
personnel to be on the fairness
committee.
III. Discussion
The Commission received eight
comment letters in response to the
proposed rule change.5 As discussed
below, commenters generally supported
the fundamental goals and objectives
behind the proposed rule change, and
several commenters suggested
modifications or requested clarification.
In response to various concerns and
suggestions raised by commenters,
FINRA filed Amendment No. 4 to the
proposed rule change.
After careful review, the Commission
finds, as discussed more fully below,
that the proposed rule change is
consistent with the requirements of the
Exchange Act and the regulations
thereunder applicable to FINRA.6 In
particular, the Commission believes that
the proposed rule change is consistent
with Sections 15A(b)(6) and 15A(b)(9) of
the Exchange Act.7
Section 15A(b)(6) requires that the
rules of a registered national securities
association be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
5 See
supra note 4.
15 U.S.C. 19(b)(2).
7 15 U.S.C. 78o–3(b)(6) and (9).
system, and, in general, to protect
investors and the public interest.
Section 15A(b)(9) requires that the rules
of an association not impose any burden
on competition that is not necessary or
appropriate in furtherance of the
purposes of the Exchange Act.
Section 3(f) of the Exchange Act
directs the Commission to consider, in
addition to the protection of investors,
whether approval of a rule change will
promote efficiency, competition, and
capital formation.8 In approving the
proposed rule change, the Commission
has considered its impact on efficiency,
competition, and capital formation.
The Commission believes that the
proposed rule change provides investors
with useful information in
understanding the primary potential
conflicts of interest faced by member
firms that issue fairness opinions. The
proposed rule change is tailored to
require any member firm that issues a
fairness opinion to include the specified
disclosures only where the member firm
knows or has reason to know that the
fairness opinion will be provided or
described to the company’s public
shareholders. Thus, even though an
opinion may be prepared for use by the
board of directors of a client of a
member firm, because the fairness
opinion is usually included in materials
provided to public shareholders, these
shareholders will now be made aware of
potential conflicts of interest with
regard to the existence of contingent
compensation arrangements and other
material relationships between the
member and any party to the transaction
that is the subject of the fairness
opinion.
Further, new Rule 2290’s procedural
requirements provide safeguards to help
member firms manage potential
conflicts of interest in approving
fairness opinions by, among other
things, requiring that any fairness
committee formed must include
representation by persons who do not
serve on the deal team to the transaction
that is the subject of the fairness
opinion.
A. Disclosure Regarding Compensation
Contingent Upon the Successful
Completion of a Transaction
New Rule 2290(a)(1) requires that
when a member firm acts as a financial
advisor to any party to a transaction that
is the subject of a fairness opinion
issued by the firm, the member must
disclose if the member will receive
compensation that is contingent upon
the successful completion of the
transaction, for rendering the fairness
6 See
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opinion and/or serving as an advisor.
New Rule 2290(a)(2) also requires that a
member firm disclose if it will receive
any other significant payment or
compensation that is contingent upon
the successful completion of the
transaction.
Commenters were generally
supportive of these provisions.
However, one commenter suggested that
the disclosure should be quantitative,
disclosing the actual amount of the
contingent compensation that would be
received by the member firm, rather
than descriptive, disclosing only the
existence of such compensation
arrangement. Commenters also
expressed concern regarding tracking
smaller amounts of contingent
compensation or other payments and
suggested a threshold amount in order
to make compliance more practicable.
Two commenters also requested that
FINRA clarify that the existence of such
contingent compensation arrangement
does not constitute an
acknowledgement that an actual conflict
of interests exists.
In FINRA’s response to comments,
FINRA stated that it continues to believe
that it is sufficient that shareholders are
aware of the existence of a contingent
compensation relationship. FINRA also
did not determine it appropriate to
clarify in the rule text that the existence
of a contingent compensation
arrangement is not an acknowledgement
that an actual conflict of interests exists.
However, in Amendment No. 4, FINRA
explained, among other things, that the
proposed rule change does not presume
a conflict merely because the
disclosures are made. Further, in
Amendment No. 4, FINRA amended the
‘‘catch-all’’ provision of paragraph (a)(2)
regarding other payments or
compensation by adding a ‘‘significant’’
qualifier. FINRA noted that it believes
this change will ease compliance
burdens.
We believe that a descriptive
disclosure that alerts shareholders to the
existence of a contingent compensation
arrangement is sufficient to serve the
basic purpose of highlighting for
investors that the issuing member
stands to benefit financially from the
successful completion of the
transaction, and therefore, that a conflict
of interests may exist. We also believe
that adding the ‘‘significant’’ qualifier
strikes a proper balance. The
Commission finds that the proposed
rule change requiring disclosure of
contingent compensation for rendering
the fairness opinion and/or serving as
an advisor, or of other significant
payments dependent on the successful
outcome of the transaction, are
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consistent with the Exchange Act,
particularly Sections 15A(b)(6) and
15A(b)(9).
B. Disclosure of Material Relationships
Between the Member and Parties to the
Transaction
New Rule 2290(a)(3) requires that
member firms disclose any material
relationships that existed during the
past two years or material relationships
that are 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
any party to the transaction that is the
subject of the fairness opinion.
Several commenters expressed
concern that the requirement was
overbroad and implied that members
must breach confidential obligations or
make premature disclosures of nonpublic information. FINRA noted that
the disclosure provision of paragraph
(a)(3) is largely based on Item 1015(b)(4)
of the Commission’s Regulation M–A
and was less specific than Item
1015(b)(4) because the disclosures of
‘‘material relationships’’ in the proposed
rule change are descriptive rather than
quantitative.
In Amendment No. 4, FINRA made
one modification to this provision to
clarify that each of the material
relationships should be identified in the
fairness opinion. The Commission finds
that the disclosure requirement
regarding material relationships is
consistent with the Exchange Act,
particularly Sections 15A(b)(6) and
15A(b)(9).
C. Disclosure Regarding Independent
Verification of Information That Formed
a Substantial Basis for the Fairness
Opinion
New Rule 2290(a)(4) requires that
members disclose if any 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
that are parties to the transaction has
been independently verified by the
member, and if so, a description of the
information or categories of information
that were verified.
Paragraph (a)(4) in the Original
Proposal would have required
disclosure of 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 has
been independently verified by the
member. Two commenters believed that
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this requirement should be deleted
because it was not clear what ‘‘verify’’
the information meant. One commenter
asserted that in most cases this
information could not be verified so the
disclosure of the categories of
information would be meaningless for
the investor. FINRA clarified in
Amendment No. 4 that it did not intend
to require independent verification of
the information provided to the
member. Rather, as noted by FINRA in
Amendment No. 4, the disclosure is
intended to provide a public
shareholder with information
concerning the extent to which
information relied on by the member
was verified. Upon further review,
FINRA determined that disclosing the
categories of information that formed a
substantial basis for the fairness opinion
would not provide meaningful guidance
to the investor, particularly when this
information is not ‘‘verified.’’
Accordingly, in Amendment No. 4,
FINRA retained the provision requiring
disclosure if any information that
formed a substantial basis for the
fairness opinion that was supplied by
the company requesting the opinion has
been verified and, if so, the requirement
that the member disclose a description
of the verified information or categories
of this information. FINRA eliminated,
however, the requirement to list each
category of information when such
information has not been verified.
FINRA noted that when no information
has been verified, a blanket statement to
that effect, as is common practice today,
would be sufficient. The Commission
finds that the disclosure requirement
regarding verification of information
supplied by the company requesting the
opinion that formed a substantial basis
for the opinion is consistent with the
Exchange Act, particularly Sections
15A(b)(6) and 15A(b)(9).
D. Disclosures Regarding Use of a
Fairness Committee
New Rule 2290(a)(5) requires member
disclosure of whether or not the fairness
opinion was approved or issued by a
fairness committee. Commenters
supported the use of committees and
noted that use of such committees is
commonplace today. One commenter
believed that the disclosure was not
material and may create a misleading
impression that a fairness opinion
rendered by a fairness committee is
substantively better than one not
approved by a committee. The
commenter suggested, however, that if
the provision is retained, FINRA should
revise the rule text to acknowledge that
a fairness committee may not always be
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called a ‘‘fairness committee’’ within a
particular firm.
In Amendment No. 4, FINRA stated
its belief that fairness opinions that are
approved by a fairness committee that
follows the procedures required by the
proposed rule generally are less
susceptible to conflicts and that fairness
opinions should include disclosure
regarding whether a fairness committee
was used. Regarding the term ‘‘fairness
committee,’’ FINRA also believes that
the term would include any committee
or group that approves a fairness
opinion in accordance with the
procedural requirements of paragraph
(b) regardless of whether the member
calls it a ‘‘fairness committee.’’ In
addition, FINRA amended the rule
language to clarify that members must
specifically disclose whether or not a
fairness committee approved or issued
the fairness opinion. The Commission
finds that the disclosure requirements
regarding use of a fairness committee
are consistent with the Exchange Act,
particularly Sections 15A(b)(6) and
15A(b)(9).
E. Disclosure Regarding Relative
Compensation to Officers, Directors,
and Employees
New Rule 2290(a)(6) requires member
firms to disclose whether or not the
fairness opinion expresses an opinion
about the fairness of the amount or
nature of the compensation from the
transaction underlying the fairness
opinion, to the company’s officers,
directors or employees, or class of such
persons, relative to the compensation to
the public shareholders of the company.
The Original Proposal would have
required members to establish a process
by which the member would evaluate
the degree to which the amount and
nature of the compensation from the
transactions underlying the fairness
opinion benefits insiders relative to the
benefits to shareholders. Commenters
argued that members do not possess the
expertise to make this determination
and that this type of determination is
outside of the scope of what the member
opines on in a fairness opinion. In
Amendment No. 4, FINRA revised the
proposed rule in response to comments,
stating that it believes the disclosure in
new Rule 2290(a)(6) suitably highlights
to the investor the potential conflict of
interests between the member issuing
the fairness opinion and the party
receiving the opinion by requiring
disclosure whether the member did or
did not take into account the amount
and nature of compensation flowing to
certain insiders relative to the benefits
to shareholders in reaching a fairness
determination.
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The Commission finds that this
provision is consistent with the
Exchange Act, particularly Sections
15A(b)(6) and 15A(b)(9).
F. Procedures for Use of a Fairness
Committee
New Rule 2290(b)(1) requires that any
member issuing a fairness opinion must
have written procedures for approval of
a fairness opinion by the member,
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 those
transactions in which it uses a fairness
committee: (A) The process for selecting
personnel to be on the fairness
committee; (B) the necessary
qualifications of persons serving on the
fairness committee; and (C) the process
to promote a balanced review by the
fairness committee, which shall include
the review and approval by persons who
do not serve on the deal team to the
transaction.
In response to the Original Proposal,
one commenter suggested requiring
‘‘written’’ procedures since FINRA
refers to having written procedures in
the rule filing but this is not indicated
in the rule text itself. FINRA made the
recommended change to the rule
language.
In addition, two commenters
recommended revising the language of
paragraph (b)(1)(C) as found in the
Original Proposal. The Original
Proposal required procedures regarding
the process to promote a balanced
review by the fairness committee, which
included the review and approval by
persons who do not serve on or advise
the deal team to the transaction.
Commenters noted that persons who
advise the deal team often consult with
the fairness committee regarding, for
instance, valuation techniques, and that
this advice should not be impaired.
Commenters also stated that the
language in the Original Proposal
implied that such consultation was not
permissible and, therefore, suggested
deleting the phrase ‘‘or advise.’’
In Amendment No. 4, FINRA stated
that it believes that commenters may
have misunderstood the intent of
paragraph (b)(1)(C) in the Original
Proposal. Nevertheless, in Amendment
No. 4, FINRA deleted the language ‘‘or
advise’’ to help alleviate confusion.
FINRA also noted in Amendment No.
4 that whether a person is considered to
be part of the deal team requires an
analysis of the particular facts and
circumstances, and will not be
determined by whether a person is
included on all document distributions
or participated in certain meetings, but
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rather will depend on the nature and
substance of his or her contacts and the
advice rendered to the firm. The
Commission finds that this procedural
requirement will help firms manage
potential conflicts of interest and is
consistent with the Exchange Act,
particularly Sections 15A(b)(6) and
15A(b)(9).
G. Procedures Regarding Valuation
Analyses
Paragraph (b)(2) of the Original
Proposal would have required members
to have a process to determine whether
the valuation analyses used in the
fairness opinion are appropriate and the
member’s procedures would have to
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. In
Amendment No. 4, however, FINRA
deleted this second requirement because
it believes that a specific requirement
addressing the detail regarding the
impact of the type of company or
transaction on the valuation analyses is
not necessary. Thus, new Rule
2290(b)(2) only requires procedures
addressing the process to determine
whether the valuation analyses used in
the fairness opinion are appropriate.
The Commission finds that this
provision is consistent with the
Exchange Act, particularly Sections
15A(b)(6) and 15A(b)(9).
H. Procedures Regarding Relative
Compensation to Officers, Directors,
and Employees
Paragraph (b)(3) of the Original
Proposal would have required members
to have a 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, was a
factor in reaching a fairness
determination. Several commenters
expressed concern regarding this
proposed provision. Commenters argued
that the proposal implied that members
must make a judgment as to the
appropriateness of compensation to
insiders relative to the compensation to
be paid to shareholders. They noted that
members issuing fairness opinions do
not have the expertise to evaluate
executive compensation matters and
that the appropriateness of management
compensation is beyond the scope of a
fairness opinion and that an insider’s
compensation in general is not a factor
in rendering a fairness opinion and,
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therefore, this provision does not make
sense in terms of how members perform
a fairness opinion evaluation.
In Amendment No. 4, FINRA stated
that the procedure required by the
Original Proposal was intended to guard
against potential conflicts of interest
between the member issuing the fairness
opinion and those insiders who may
stand to gain an economic benefit from
the transaction, and who generally are
in a position to make determinations
about which member will perform the
fairness opinion evaluation. In response
to comments, however, in Amendment
No. 4 FINRA deleted the procedures in
paragraph (b)(3) of the Original Proposal
and added the disclosure requirements
in paragraph (a)(6) to new Rule 2290.
The Commission finds that this
provision is responsive to comments
received and is consistent with the
Exchange Act, particularly Sections
15A(b)(6) and 15A(b)(9).
IV. Accelerated Approval of
Amendment No. 4 and Solicitation of
Comments
The Commission finds good cause to
approve Amendment No. 4 to the
proposed rule change prior to the
thirtieth day after the date of
publication of notice of filing of the
amendment in the Federal Register. The
proposed rule change was published in
the Federal Register on April 11, 2006.9
FINRA submitted Amendment No. 4 in
response to comments received on the
proposed rule change. The Commission
believes that Amendment No. 4 clarifies
the obligations of FINRA member firms.
Amendment No. 4 does not contain
major modifications that are more
restrictive than the scope of the
proposed rule change as published in
the Federal Register. The Commission
believes that approving Amendment No.
4 will provide greater clarity and
simplify compliance, thus furthering the
public interest and the investor
protection goals of the Exchange Act.
Finally, the Commission finds that it is
in the public interest to approve the
proposed rule change as soon as
possible to expedite its implementation.
Accordingly, the Commission believes
good cause exists, consistent with
Sections 15A(b)(6) and 19(b) of the
Exchange Act,10 to approve Amendment
No.4 to the proposed rule change on an
accelerated basis.
Interested persons are invited to
submit written data, views, and
arguments concerning Amendment No.
4, including whether Amendment No. 4
is consistent with the Act. Comments
9 See
10 15
supra note 3.
U.S.C. 78o–3(b)(6), and 78s(b).
VerDate Aug<31>2005
16:46 Oct 18, 2007
Jkt 214001
may be submitted by any of the
following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NASD–2005–080 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NASD–2005–080. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of such filing also will be
available for inspection and copying at
the principal office of FINRA. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NASD–2005–080 and
should be submitted on or before
November 8, 2007.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,11
that the proposed rule change (SR–
NASD–2005–080), as modified by
Amendment Nos. 1, 2, 3, and 4, be, and
hereby is, approved.12
11 15
12 17
PO 00000
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
Frm 00083
Fmt 4703
Sfmt 4703
59321
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.12
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–20585 Filed 10–18–07; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56661; File No. SR–NASD–
2005–100]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc. (n/k/a Financial Industry
Regulatory Authority, Inc.); Notice of
Filing of Proposed Rule Change and
Amendment Nos. 1, 2, 3, and 4 Thereto,
To Require Members To Provide
Customers in TRACE-Eligible Debt
Securities With Additional,
Transaction-Specific Disclosures and
To Notify Customers of the Availability
of a Disclosure Document
October 15, 2007.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
19, 2005, the National Association of
Securities Dealers, Inc. (‘‘NASD’’), n/k/
a Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’),3 filed with
the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by FINRA.4 On
December 21, 2005, NASD filed
Amendment No. 1 to the proposed rule
change. On January 26, 2007, NASD
filed Amendment No. 2 to the proposed
rule change. On July 16, 2007, NASD
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 On July 26, 2007, the Commission approved a
proposed rule change filed by NASD to amend
NASD’s Certificate of Incorporation to reflect its
name change to FINRA, in connection with the
consolidation of the member firm regulatory
functions of NASD and NYSE Regulation, Inc. See
Securities Exchange Act Release No. 56146 (July 26,
2007), 72 FR 42190 (August 1, 2007).
4 Commission staff made certain changes to the
description of the proposed rule change with the
consent of FINRA staff to further clarify the
description, to reflect the organization’s name
change, and to make other changes incidental to the
consolidation during a telephone conversation
between Sharon Zackula, Associate Vice President
and Associate General Counsel, and James Eastman,
Assistant General Counsel, FINRA, and Joshua
Kans, Senior Special Counsel, and Kristina Fausti,
Special Counsel, Division of Market Regulation,
Commission, on March 20, 2007; telephone
conversations between Sharon Zackula and James
Eastman, and Kristina Fausti, on August 17, 2007,
and August 20, 2007, respectively; and a telephone
conversation between Sharon Zackula, and Josh
Kans and Kristina Fausti, on September 21, 2007.
2 17
E:\FR\FM\19OCN1.SGM
19OCN1
]]>Agencies
[Federal Register Volume 72, Number 202 (Friday, October 19, 2007)]
[Notices]
[Pages 59317-59321]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-20585]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56645; File No. SR-NASD-2005-080]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.);
Notice of Filing of Amendment No. 4 and Order Granting Accelerated
Approval of Proposed Rule Change as Modified by Amendment Nos. 1, 2, 3
and 4 Relating to Fairness Opinions
October 11, 2007
I. Introduction
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ on
June 22, 2005, the National Association of Securities Dealers, Inc. (n/
k/a Financial Industry Regulatory Authority, Inc. (``FINRA'')), filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change relating to fairness opinion disclosures and procedures.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
On April 4, 2006, the Commission issued a release noticing the
proposed rule change, as modified by Amendment Nos. 1, 2, and 3, which
was published for comment in the Federal Register on
[[Page 59318]]
April 11, 2006.\3\ The comment period expired on May 2, 2006. The
Commission received eight comment letters in response to the proposed
rule change.\4\ On June 7, 2007, FINRA filed Amendment No. 4 to the
proposed rule change. This order provides notice of the proposed rule
change, as modified by Amendment No. 4, and approves the proposed rule
change as amended on an accelerated basis.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 53598 (April 4,
2006), 71 FR 18395 (April 11, 2006) (``Original Proposal'').
\4\ See Letters to Jonathan G. Katz, Secretary, Commission,
from: Michael W. Kane, Ph.D., J.D., President and CEO, Kane &
Company, Inc. (May 1, 2006); Donna M. Hitscherich, Faculty, Columbia
University Graduate School of Business, New York (May 1, 2006);
Gilbert E. Matthews, CFA, Chairman, Sutter Securities Incorporated
(May 1, 2006); Ann Yerger, Executive Director, Council of
Institutional Investors (May 1, 2006); John Faulkner, Chair, Capital
Markets Committee, Securities Industry Association (May 2, 2006);
Marjorie Bowen, Managing Director, National Co-Director of Fairness
Opinion Practice, Houlihan Lokey Howard & Zukin Capital, Inc. (May
2, 2006); Daniel S. Sternberg, Committee Chair, Special Committee on
Mergers, Acquisitions and Corporate Control Contests, The
Association of the Bar of the City of New York (May 3, 2006);
Michael J. Holiday, Chair, Committee on Securities Regulation, New
York State Bar Association (May 11, 2006).
---------------------------------------------------------------------------
II. Background
FINRA is proposing to establish new Rule 2290 to address
disclosures and procedures in connection with the issuance of fairness
opinions by member firms. Fairness opinions are routinely obtained by
boards of directors in corporate control transactions and address the
fairness, from a financial perspective, of the consideration being
offered in the transaction.
Fairness opinions may serve a variety of purposes, including as
indicia of the exercise of care by the board of directors in a
corporate control transaction as well as to supplement information
available to shareholders and, as such, are often provided as part of
proxy materials. Fairness opinions offer a view as to whether the
consideration offered in a deal is within the range of what would be
considered ``fair,'' rather than offering an opinion as to whether the
consideration offered is the best price that could likely be attained.
In its proposal, FINRA expressed concern that the disclosures
provided in fairness opinions may not be adequate to alert shareholders
as to potential conflicts of interest that may exist between the firm
issuing the opinion and the parties involved in the transaction. For
example, in many cases, the firm issuing the fairness opinion is also
acting as an advisor to a party to the transaction. As such, there may
be a contingent compensation structure dependent upon the success of
the deal. There may also be other material relationships between the
member firm and a party to the transaction that is the subject of the
fairness opinion involving compensation that has been, or is intended
to be, received. Thus, the proposed rule change would provide
shareholders with certain disclosures with regard to any fairness
opinion issued by a member firm if, at the time of its issuance to the
board of directors, the member knows or has reason to know that the
fairness opinion will be provided or described to the company's public
shareholders.
Further, the proposed rule change seeks to require member firms to
establish written procedures for use in issuing fairness opinions,
including addressing when a member firm will employ the use of an
internal committee in approving a fairness opinion. In cases where a
committee is used, the member must set forth in its procedures, among
other things, the process for selecting personnel to be on the fairness
committee.
III. Discussion
The Commission received eight comment letters in response to the
proposed rule change.\5\ As discussed below, commenters generally
supported the fundamental goals and objectives behind the proposed rule
change, and several commenters suggested modifications or requested
clarification. In response to various concerns and suggestions raised
by commenters, FINRA filed Amendment No. 4 to the proposed rule change.
---------------------------------------------------------------------------
\5\ See supra note 4.
---------------------------------------------------------------------------
After careful review, the Commission finds, as discussed more fully
below, that the proposed rule change is consistent with the
requirements of the Exchange Act and the regulations thereunder
applicable to FINRA.\6\ In particular, the Commission believes that the
proposed rule change is consistent with Sections 15A(b)(6) and
15A(b)(9) of the Exchange Act.\7\
---------------------------------------------------------------------------
\6\ See 15 U.S.C. 19(b)(2).
\7\ 15 U.S.C. 78o-3(b)(6) and (9).
---------------------------------------------------------------------------
Section 15A(b)(6) requires that the rules of a registered national
securities association be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. Section 15A(b)(9) requires
that the rules of an association not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Exchange Act.
Section 3(f) of the Exchange Act directs the Commission to
consider, in addition to the protection of investors, whether approval
of a rule change will promote efficiency, competition, and capital
formation.\8\ In approving the proposed rule change, the Commission has
considered its impact on efficiency, competition, and capital
formation.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
The Commission believes that the proposed rule change provides
investors with useful information in understanding the primary
potential conflicts of interest faced by member firms that issue
fairness opinions. The proposed rule change is tailored to require any
member firm that issues a fairness opinion to include the specified
disclosures only where the member firm knows or has reason to know that
the fairness opinion will be provided or described to the company's
public shareholders. Thus, even though an opinion may be prepared for
use by the board of directors of a client of a member firm, because the
fairness opinion is usually included in materials provided to public
shareholders, these shareholders will now be made aware of potential
conflicts of interest with regard to the existence of contingent
compensation arrangements and other material relationships between the
member and any party to the transaction that is the subject of the
fairness opinion.
Further, new Rule 2290's procedural requirements provide safeguards
to help member firms manage potential conflicts of interest in
approving fairness opinions by, among other things, requiring that any
fairness committee formed must include representation by persons who do
not serve on the deal team to the transaction that is the subject of
the fairness opinion.
A. Disclosure Regarding Compensation Contingent Upon the Successful
Completion of a Transaction
New Rule 2290(a)(1) requires that when a member firm acts as a
financial advisor to any party to a transaction that is the subject of
a fairness opinion issued by the firm, the member must disclose if the
member will receive compensation that is contingent upon the successful
completion of the transaction, for rendering the fairness
[[Page 59319]]
opinion and/or serving as an advisor. New Rule 2290(a)(2) also requires
that a member firm disclose if it will receive any other significant
payment or compensation that is contingent upon the successful
completion of the transaction.
Commenters were generally supportive of these provisions. However,
one commenter suggested that the disclosure should be quantitative,
disclosing the actual amount of the contingent compensation that would
be received by the member firm, rather than descriptive, disclosing
only the existence of such compensation arrangement. Commenters also
expressed concern regarding tracking smaller amounts of contingent
compensation or other payments and suggested a threshold amount in
order to make compliance more practicable. Two commenters also
requested that FINRA clarify that the existence of such contingent
compensation arrangement does not constitute an acknowledgement that an
actual conflict of interests exists.
In FINRA's response to comments, FINRA stated that it continues to
believe that it is sufficient that shareholders are aware of the
existence of a contingent compensation relationship. FINRA also did not
determine it appropriate to clarify in the rule text that the existence
of a contingent compensation arrangement is not an acknowledgement that
an actual conflict of interests exists. However, in Amendment No. 4,
FINRA explained, among other things, that the proposed rule change does
not presume a conflict merely because the disclosures are made.
Further, in Amendment No. 4, FINRA amended the ``catch-all'' provision
of paragraph (a)(2) regarding other payments or compensation by adding
a ``significant'' qualifier. FINRA noted that it believes this change
will ease compliance burdens.
We believe that a descriptive disclosure that alerts shareholders
to the existence of a contingent compensation arrangement is sufficient
to serve the basic purpose of highlighting for investors that the
issuing member stands to benefit financially from the successful
completion of the transaction, and therefore, that a conflict of
interests may exist. We also believe that adding the ``significant''
qualifier strikes a proper balance. The Commission finds that the
proposed rule change requiring disclosure of contingent compensation
for rendering the fairness opinion and/or serving as an advisor, or of
other significant payments dependent on the successful outcome of the
transaction, are consistent with the Exchange Act, particularly
Sections 15A(b)(6) and 15A(b)(9).
B. Disclosure of Material Relationships Between the Member and Parties
to the Transaction
New Rule 2290(a)(3) requires that member firms disclose any
material relationships that existed during the past two years or
material relationships that are 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 any party to the
transaction that is the subject of the fairness opinion.
Several commenters expressed concern that the requirement was
overbroad and implied that members must breach confidential obligations
or make premature disclosures of non-public information. FINRA noted
that the disclosure provision of paragraph (a)(3) is largely based on
Item 1015(b)(4) of the Commission's Regulation M-A and was less
specific than Item 1015(b)(4) because the disclosures of ``material
relationships'' in the proposed rule change are descriptive rather than
quantitative.
In Amendment No. 4, FINRA made one modification to this provision
to clarify that each of the material relationships should be identified
in the fairness opinion. The Commission finds that the disclosure
requirement regarding material relationships is consistent with the
Exchange Act, particularly Sections 15A(b)(6) and 15A(b)(9).
C. Disclosure Regarding Independent Verification of Information That
Formed a Substantial Basis for the Fairness Opinion
New Rule 2290(a)(4) requires that members disclose if any
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 that are parties to the transaction has been
independently verified by the member, and if so, a description of the
information or categories of information that were verified.
Paragraph (a)(4) in the Original Proposal would have required
disclosure of 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 has been independently
verified by the member. Two commenters believed that this requirement
should be deleted because it was not clear what ``verify'' the
information meant. One commenter asserted that in most cases this
information could not be verified so the disclosure of the categories
of information would be meaningless for the investor. FINRA clarified
in Amendment No. 4 that it did not intend to require independent
verification of the information provided to the member. Rather, as
noted by FINRA in Amendment No. 4, the disclosure is intended to
provide a public shareholder with information concerning the extent to
which information relied on by the member was verified. Upon further
review, FINRA determined that disclosing the categories of information
that formed a substantial basis for the fairness opinion would not
provide meaningful guidance to the investor, particularly when this
information is not ``verified.''
Accordingly, in Amendment No. 4, FINRA retained the provision
requiring disclosure if any information that formed a substantial basis
for the fairness opinion that was supplied by the company requesting
the opinion has been verified and, if so, the requirement that the
member disclose a description of the verified information or categories
of this information. FINRA eliminated, however, the requirement to list
each category of information when such information has not been
verified. FINRA noted that when no information has been verified, a
blanket statement to that effect, as is common practice today, would be
sufficient. The Commission finds that the disclosure requirement
regarding verification of information supplied by the company
requesting the opinion that formed a substantial basis for the opinion
is consistent with the Exchange Act, particularly Sections 15A(b)(6)
and 15A(b)(9).
D. Disclosures Regarding Use of a Fairness Committee
New Rule 2290(a)(5) requires member disclosure of whether or not
the fairness opinion was approved or issued by a fairness committee.
Commenters supported the use of committees and noted that use of such
committees is commonplace today. One commenter believed that the
disclosure was not material and may create a misleading impression that
a fairness opinion rendered by a fairness committee is substantively
better than one not approved by a committee. The commenter suggested,
however, that if the provision is retained, FINRA should revise the
rule text to acknowledge that a fairness committee may not always be
[[Page 59320]]
called a ``fairness committee'' within a particular firm.
In Amendment No. 4, FINRA stated its belief that fairness opinions
that are approved by a fairness committee that follows the procedures
required by the proposed rule generally are less susceptible to
conflicts and that fairness opinions should include disclosure
regarding whether a fairness committee was used. Regarding the term
``fairness committee,'' FINRA also believes that the term would include
any committee or group that approves a fairness opinion in accordance
with the procedural requirements of paragraph (b) regardless of whether
the member calls it a ``fairness committee.'' In addition, FINRA
amended the rule language to clarify that members must specifically
disclose whether or not a fairness committee approved or issued the
fairness opinion. The Commission finds that the disclosure requirements
regarding use of a fairness committee are consistent with the Exchange
Act, particularly Sections 15A(b)(6) and 15A(b)(9).
E. Disclosure Regarding Relative Compensation to Officers, Directors,
and Employees
New Rule 2290(a)(6) requires member firms to disclose whether or
not the fairness opinion expresses an opinion about the fairness of the
amount or nature of the compensation from the transaction underlying
the fairness opinion, to the company's officers, directors or
employees, or class of such persons, relative to the compensation to
the public shareholders of the company.
The Original Proposal would have required members to establish a
process by which the member would evaluate the degree to which the
amount and nature of the compensation from the transactions underlying
the fairness opinion benefits insiders relative to the benefits to
shareholders. Commenters argued that members do not possess the
expertise to make this determination and that this type of
determination is outside of the scope of what the member opines on in a
fairness opinion. In Amendment No. 4, FINRA revised the proposed rule
in response to comments, stating that it believes the disclosure in new
Rule 2290(a)(6) suitably highlights to the investor the potential
conflict of interests between the member issuing the fairness opinion
and the party receiving the opinion by requiring disclosure whether the
member did or did not take into account the amount and nature of
compensation flowing to certain insiders relative to the benefits to
shareholders in reaching a fairness determination.
The Commission finds that this provision is consistent with the
Exchange Act, particularly Sections 15A(b)(6) and 15A(b)(9).
F. Procedures for Use of a Fairness Committee
New Rule 2290(b)(1) requires that any member issuing a fairness
opinion must have written procedures for approval of a fairness opinion
by the member, 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 those transactions in which
it uses a fairness committee: (A) The process for selecting personnel
to be on the fairness committee; (B) the necessary qualifications of
persons serving on the fairness committee; and (C) the process to
promote a balanced review by the fairness committee, which shall
include the review and approval by persons who do not serve on the deal
team to the transaction.
In response to the Original Proposal, one commenter suggested
requiring ``written'' procedures since FINRA refers to having written
procedures in the rule filing but this is not indicated in the rule
text itself. FINRA made the recommended change to the rule language.
In addition, two commenters recommended revising the language of
paragraph (b)(1)(C) as found in the Original Proposal. The Original
Proposal required procedures regarding the process to promote a
balanced review by the fairness committee, which included the review
and approval by persons who do not serve on or advise the deal team to
the transaction. Commenters noted that persons who advise the deal team
often consult with the fairness committee regarding, for instance,
valuation techniques, and that this advice should not be impaired.
Commenters also stated that the language in the Original Proposal
implied that such consultation was not permissible and, therefore,
suggested deleting the phrase ``or advise.''
In Amendment No. 4, FINRA stated that it believes that commenters
may have misunderstood the intent of paragraph (b)(1)(C) in the
Original Proposal. Nevertheless, in Amendment No. 4, FINRA deleted the
language ``or advise'' to help alleviate confusion.
FINRA also noted in Amendment No. 4 that whether a person is
considered to be part of the deal team requires an analysis of the
particular facts and circumstances, and will not be determined by
whether a person is included on all document distributions or
participated in certain meetings, but rather will depend on the nature
and substance of his or her contacts and the advice rendered to the
firm. The Commission finds that this procedural requirement will help
firms manage potential conflicts of interest and is consistent with the
Exchange Act, particularly Sections 15A(b)(6) and 15A(b)(9).
G. Procedures Regarding Valuation Analyses
Paragraph (b)(2) of the Original Proposal would have required
members to have a process to determine whether the valuation analyses
used in the fairness opinion are appropriate and the member's
procedures would have to 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. In
Amendment No. 4, however, FINRA deleted this second requirement because
it believes that a specific requirement addressing the detail regarding
the impact of the type of company or transaction on the valuation
analyses is not necessary. Thus, new Rule 2290(b)(2) only requires
procedures addressing the process to determine whether the valuation
analyses used in the fairness opinion are appropriate. The Commission
finds that this provision is consistent with the Exchange Act,
particularly Sections 15A(b)(6) and 15A(b)(9).
H. Procedures Regarding Relative Compensation to Officers, Directors,
and Employees
Paragraph (b)(3) of the Original Proposal would have required
members to have a 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,
was a factor in reaching a fairness determination. Several commenters
expressed concern regarding this proposed provision. Commenters argued
that the proposal implied that members must make a judgment as to the
appropriateness of compensation to insiders relative to the
compensation to be paid to shareholders. They noted that members
issuing fairness opinions do not have the expertise to evaluate
executive compensation matters and that the appropriateness of
management compensation is beyond the scope of a fairness opinion and
that an insider's compensation in general is not a factor in rendering
a fairness opinion and,
[[Page 59321]]
therefore, this provision does not make sense in terms of how members
perform a fairness opinion evaluation.
In Amendment No. 4, FINRA stated that the procedure required by the
Original Proposal was intended to guard against potential conflicts of
interest between the member issuing the fairness opinion and those
insiders who may stand to gain an economic benefit from the
transaction, and who generally are in a position to make determinations
about which member will perform the fairness opinion evaluation. In
response to comments, however, in Amendment No. 4 FINRA deleted the
procedures in paragraph (b)(3) of the Original Proposal and added the
disclosure requirements in paragraph (a)(6) to new Rule 2290. The
Commission finds that this provision is responsive to comments received
and is consistent with the Exchange Act, particularly Sections
15A(b)(6) and 15A(b)(9).
IV. Accelerated Approval of Amendment No. 4 and Solicitation of
Comments
The Commission finds good cause to approve Amendment No. 4 to the
proposed rule change prior to the thirtieth day after the date of
publication of notice of filing of the amendment in the Federal
Register. The proposed rule change was published in the Federal
Register on April 11, 2006.\9\ FINRA submitted Amendment No. 4 in
response to comments received on the proposed rule change. The
Commission believes that Amendment No. 4 clarifies the obligations of
FINRA member firms. Amendment No. 4 does not contain major
modifications that are more restrictive than the scope of the proposed
rule change as published in the Federal Register. The Commission
believes that approving Amendment No. 4 will provide greater clarity
and simplify compliance, thus furthering the public interest and the
investor protection goals of the Exchange Act. Finally, the Commission
finds that it is in the public interest to approve the proposed rule
change as soon as possible to expedite its implementation.
---------------------------------------------------------------------------
\9\ See supra note 3.
---------------------------------------------------------------------------
Accordingly, the Commission believes good cause exists, consistent
with Sections 15A(b)(6) and 19(b) of the Exchange Act,\10\ to approve
Amendment No.4 to the proposed rule change on an accelerated basis.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78o-3(b)(6), and 78s(b).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 4, including whether Amendment No. 4
is consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NASD-2005-080 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASD-2005-080. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of FINRA. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-NASD-2005-080 and should be
submitted on or before November 8, 2007.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\11\ that the proposed rule change (SR-NASD-2005-080), as
modified by Amendment Nos. 1, 2, 3, and 4, be, and hereby is,
approved.\12\
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\11\ 15 U.S.C. 78s(b)(2).
\12\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-20585 Filed 10-18-07; 8:45 am]
BILLING CODE 8011-01-P
