“Wall Street bankers involved in the lucrative and thinly policed business of offering “fairness opinions” on the value of corporate mergers and acquisitions may face tough new rules for disclosing the financial incentives that they and the company executives they advise have for pushing through deals,” writes Ann Davis in today’s Wall Street Journal.

“The NASD, the main self-regulatory body for brokerage firms, has begun a potentially far-reaching inquiry into the fees, methods and possible conflicts of interest connected with such opinions, people familiar with the inquiry say. At a time when the M&A business is gaining momentum in a resurgent economy — with 7,226 deals totaling $558 billion in the U.S. last year, according to data company Dealogic — any significant regulatory shift could touch a lot of wallets.”

“The changes being considered by the NASD, formerly known as the National Association of Securities Dealers, also could help prevent ill-conceived deals that ultimately erode shareholder value or force thousands of layoffs. They could even alter the dynamics of how companies are bought and sold.”

“The NASD sent letters to several Wall Street firms earlier this year requesting information about their recently issued fairness opinions in an attempt to examine possible conflicts in past deals. The agency’s board of governors may vote as soon as this summer to propose new rules governing prospective fairness opinions. Spokeswoman Nancy Condon said that the agency is looking at a variety of ‘possible approaches’ to deal with conflicts of interest involving such opinions but that ‘primarily, we’ve been working on disclosure requirements.’ She declined to comment further on the inquiry.”

“While the NASD seems to have seized the lead on the issue, other regulators could join in. Securities watchdogs are eager to appear more proactive after being criticized in recent years for allowing longstanding conflicts of interest to fester, including stock research tainted by bankers’ desire to tout clients during the technology boom.”

“The NASD’s proposals would require approval by the Securities and Exchange Commission, which is itself conducting an inquiry into a broader array of potential conflicts of interest on Wall Street and looking at ways to mitigate them. New York State’s attorney general, Eliot Spitzer, has said in the past that he was considering looking more closely at fairness opinions, but a spokeswoman said yesterday that his office isn’t currently active in the area.”

“Fairness opinions are provided routinely on a host of corporate transactions, including initial public stock offerings, takeovers and spinoffs of company units. In mergers and acquisitions, corporate boards commonly seek these opinions to protect against legal challenges over a decision to do a deal.”

“At a few million dollars a pop in many cases, they’ve become a money-making sideline for Wall Street that can also lead to investment-banking work. The opinions are sometimes done by investment bankers whose firms have no other role in the deal. But they also can be prepared by bankers from the same firm that suggested a deal take place and that stands to collect a ‘success fee’ that is a percentage of the deal’s price at completion.”