SEC Chief Says He’s Leery of Paid ‘Fairness Opinions’

WASHINGTON — The chairman of the Securities and Exchange Commission testified Thursday that he is “quite suspicious” of opinions written by hired financial advisers on the fairness of proposed leveraged buyouts.

David S. Ruder, offering his personal opinion, said the investment banks and others providing such “fairness opinions” often receive higher fees if the buyout goes through.

Ruder also told the House Energy and Commerce telecommunications and finance subcommittee that the SEC is reviewing all aspects of leveraged buyouts. The commission wants to determine whether it should issue new rules to protect investors, said Ruder, who predicted the review would continue through February.

Leveraged buyouts occur when investors borrow heavily to buy out a company and then pay off the debt with that company’s cash flow or by the sale of its assets.

Fairness opinions are primary factors in the transactions, Ruder said, because “shareholders accord a great degree of weight to the fact that a favorable opinion has been issued.”

The opinions usually attest that the price offered for shares of a company is a fair one.

The hired financial adviser must rely almost exclusively on the limited information that management supplies about the company.

Sounds Like ‘Kickback’

Subcommittee Chairman Edward Markey (D-Mass.) said an investment bank may receive $1 million to prepare the opinion, but $1.5 million if the deal goes through.

“It sounds a little bit like a kickback to outsiders,” Markey said.

Asked by Rep. Mike Synar (D-Okla.) whether fairness opinions were independent, Ruder said, “All in all, I am quite suspicious in a significant number of cases, that the fairness opinion is prepared by somebody with an incentive to go along with management.

“Personally, I think that needs to be addressed.”

He said “significant numbers of letters do not include the kind of information that I consider appropriate” for shareholders to make a decision.

Ruder said the SEC is also considering whether to extend its most comprehensive disclosure rule to all forms of leveraged buyouts. Currently, the most stringent disclosure requirements apply only to buyouts that result in a class of equity securities no longer being publicly held.

The rule requires disclosure of the purpose of the transaction and its fairness to non-affiliated shareholders. It also calls for detailed disclosure of alternatives considered and the factors upon which the fairness assessment was based.

The commission is also studying the impact of leveraged buyouts on bondholders, Ruder said.

Asked if large leveraged buyouts could undermine the economy, Ruder said, “I do not believe it is easy to determine the economic consequences” of takeovers and leveraged buyouts.

“Because it is so difficult, I think they should go forward,” he added. “I, for one, would not interfere with the process by putting down limitations based on economic considerations.”

When Rep. Dennis Eckart (D-Ohio) asked if the SEC should have authority to devise a formula that limits debt in a buyout, Ruder responded: “I would not like to have that authority. It would be extremely difficult to make those economic judgments.

“I don’t think there’s a significant body that can tell us what the debt level should be.”