Quick Answer
When a member firm knows or has reason to know that its fairness opinion will reach public shareholders, the FINRA fairness opinion rule requires six disclosures in the opinion letter: advisor relationships and fees, other contingent payments, material relationships in the past two years, information verification, fairness-committee approval, and insider-compensation comparisons. The rule requires disclosure, not prohibition.
The FINRA fairness opinion rule has two halves. The procedural half (covered in the prior two sections) governs how the opinion is built and approved. The disclosure half, sometimes called the rule's "a" prong, governs what must be disclosed in the opinion letter when the opinion will reach public shareholders. The exam tests the disclosure half more heavily than any other piece of the rule.
When Does the Disclosure Obligation Apply?
The disclosure obligations do not attach to every fairness opinion. They attach when:
- The opinion is being issued to the board of directors of the company, AND
- The member firm knows or has reason to know that the opinion will be provided to (or described to) the company's public shareholders
The most common channel through which the opinion reaches public shareholders is inclusion of the opinion in the proxy statement, prospectus, or tender-offer document sent to shareholders. The proxy / prospectus disclosure path is covered in the opinion letter and proxy disclosure section.
If the opinion is for a fully private company with no public shareholders and no public disclosure path, the disclosure trigger is not pulled. The procedural requirements still apply; the substantive disclosure list does not.
Exam Tip: Gotchas
- The disclosure trigger is public shareholders receiving or being told about the opinion, not the opinion itself. An opinion for a private company that stays inside the boardroom does not trigger the disclosure list.
- "Knows or has reason to know" is the standard. A member firm that hands the opinion to the board for a deal headed to a shareholder vote has reason to know it will reach shareholders, even if no one explicitly told the firm so.
What Are the Six Required Disclosure Items?
When the trigger applies, the opinion letter must address all six items below. Three relate to compensation and relationships (items 1, 2, 3), two relate to the opinion's own preparation (items 4 and 5), and one relates to the insider-compensation question (item 6).
| Item | Required Disclosure |
|---|---|
| (1) Advisor relationships and success fees | Whether the member has acted as a financial advisor to any party to the transaction, and if so, whether it will receive compensation contingent on successful completion (the "success fee"), for rendering the fairness opinion and/or for serving as an advisor |
| (2) Other contingent payments | Whether the member will receive any other significant payment or compensation contingent on completion of the transaction. Example: compensation from a related transaction such as stapled financing offered to the buyer |
| (3) Material relationships, past two years | Any material relationships with the parties that existed during the past two years, or that are mutually understood to be contemplated, in which compensation was received or is intended to be received |
| (4) Independent verification | If information supplied by the company that formed a substantial basis for the opinion has been independently verified by the member, a description of the information or categories verified |
| (5) Fairness committee approval | Whether the opinion was approved or issued by a fairness committee |
| (6) Insider compensation question | Whether the opinion expresses a view on the fairness of the amount or nature of compensation to officers, directors, or employees (or any class of such persons) relative to the compensation to the public shareholders. The rule uses "compensation" for both sides of the comparison, even though shareholders typically receive deal "consideration" |
The six items are a closed list the firm cannot shrink by picking the ones it likes. Items 1, 2, and 4 supply disclosure content only if their underlying fact is true (an advisor relationship, another contingent payment, or verified information); items 5 and 6 always require a yes-or-no answer regardless of the facts.
For item 2, "significant" is not a fixed dollar amount or percentage. A de minimis payment is excluded; significance turns on whether a reasonable reader would want to know about the conflict. The first three items call for descriptive information, not a quantitative breakdown, and no disclosure item requires the firm to breach client confidentiality.
Exam Tip: Gotchas
- The material-relationships lookback is two years, not one year, not three, and not five. The exam tests this number directly. Memorize two-year lookback.
- The material-relationships disclosure reaches BOTH sides of the deal, not just the client that hired you. A firm giving a fairness opinion to a target's board must also disclose any material relationship it has with the acquiror. The two-year lookback runs against every party to the transaction.
- Item 4 is conditioned on "if" verification occurred, unlike items 5 and 6, which the rule phrases as "whether or not" and always require a yes-or-no answer. Item 4's disclosure content (a description of what was verified) applies only when substantial-basis company information was in fact independently verified.
- The fairness committee disclosure (item 5) requires a yes or no statement in the letter, not just adherence to the procedural rule. The committee approval is operational; the letter disclosure is documentary.
Which Common Conflict Scenarios Trigger Disclosure?
The disclosure items map cleanly onto the common conflict patterns the exam likes to write into scenarios.
| Scenario | Disclosure Item |
|---|---|
| Success fee: Banker's fee is contingent on the deal closing | Item 1 (success-fee disclosure) |
| Stapled financing: Sell-side advisor offers acquisition financing to the buyer | Item 2 (other contingent payments) |
| Prior advisory engagements in the past two years for either party | Item 3 (material relationships) |
| Lending or trading relationships with either party in the past two years | Item 3 (material relationships) |
| Independent verification was performed on client projections forming a substantial basis | Item 4 (verification disclosure) |
| Insider compensation is part of the deal package | Item 6 (insider-compensation question) |
The stapled financing scenario is heavily tested. The mechanics:
- The sell-side advisor pre-arranges debt financing the buyer can use to fund the acquisition
- The financing offer is "stapled" to the offering materials sent to bidders
- The advisor earns fees on both sides: M&A advisory fees from the seller, plus financing fees from whichever buyer uses the staple
- That dual-fee setup is a conflict, and the rule requires disclosure of it under item 2
As a matter of practice, some firms go further than the rule requires, for example by declining to provide stapled financing while also writing the sell-side fairness opinion, or by conditioning the opinion on a second opinion from an unconflicted advisor. The rule itself requires disclosure of the conflict, not these extra steps.
Think of it this way: the exam treats the rule like a checklist. Each conflict pattern has a specific disclosure item attached to it. If a scenario hands you a success fee, the answer is item 1. If a scenario hands you stapled financing, the answer is item 2. If a scenario hands you a prior M&A engagement two years ago, the answer is item 3.
Exam Tip: Gotchas
- A success fee is the textbook item 1 disclosure. Answer choices that say the success fee can be hidden, that it doesn't need disclosure, or that it disqualifies the firm are all wrong. The fee is disclosed and the firm continues.
- Stapled financing is the textbook item 2 disclosure. The exam may describe the arrangement without naming it; the giveaway is "the sell-side advisor also offers financing to the buyer."
- Prior engagements within the past two years map to item 3, not item 1 or 2. Item 3 is the lookback; items 1 and 2 are the current deal.
Does the Rule Prohibit a Conflicted Firm From Issuing the Opinion?
The most important conceptual point about the FINRA fairness opinion rule: it is a disclosure rule, not a prohibition rule.
- A member firm can issue a fairness opinion on a deal where it earns a success fee
- A member firm can issue a fairness opinion where it provides stapled financing to the buyer
- A member firm can issue a fairness opinion where it had prior advisory work for either party in the past two years
What the firm must do in each case is disclose the conflict. The decision whether to engage a conflicted advisor (or whether to commission a second opinion from an unconflicted firm) belongs to the client's board or special committee, informed by the disclosed conflicts.
Exam Tip: Gotchas
- The fairness opinion rule is disclosure, not prohibition. Answer choices that say "the conflicted firm cannot issue the opinion" are wrong by design. The firm can issue the opinion; the conflict must be disclosed.
- The board decides whether to use the conflicted advisor. The rule does not make that decision for the board. The rule makes sure the board has the information it needs to decide.
What Should You Check on Exam Day?
- Confirm the trigger is the firm knowing or having reason to know the opinion reaches public shareholders, not the mere existence of the opinion.
- Memorize the closed list of six items and the two-year material-relationships lookback.
- Map each conflict scenario to its item: success fee to item 1, stapled financing to item 2, prior engagements or lending/trading relationships to item 3.
- Remember the rule discloses conflicts; it does not bar a conflicted firm from issuing the opinion. The board decides whether to use a conflicted advisor.
- Recall item 4 uses conditional "if" language (describe what was verified when substantial-basis information was verified), unlike items 5 and 6, which use "whether or not" and always require a yes-or-no answer.