Can a North Carolina lawyer sell financial products and services to his own legal clients through an ancillary business and earn fees or commissions?

Plain-English summary

A lawyer wanted to run a separate ancillary business providing financial services (selecting, buying, and disposing of securities, life insurance, and annuities) to clients and non-clients, earning consulting fees, advisory fees, and commissions. The inquiry asks whether he may offer those services to his legal clients and be paid for them. The opinion answers yes, subject to several rules.

Rule 5.7 governs a lawyer's law-related services. If they are provided so as not to be distinct from legal services, all the Rules apply; if provided through a separate entity, the Rules still apply unless the lawyer takes reasonable measures to ensure the person obtaining the services knows they are not legal services and that the lawyer-client protections do not exist (Rule 5.7(a)(2)). Even when the lawyer uses a separate entity and gives that notice, he remains bound by the Rules as to referring his legal clients to the ancillary business: Comment [6] to Rule 5.7 requires compliance with Rule 1.8(a) (business transactions with clients) when a client is referred to a lawyer-controlled ancillary business. Rule 1.8(a) permits such a transaction only if the terms are fair and reasonable and fully disclosed in writing the client can understand, the client is advised in writing to consider independent counsel and given a reasonable chance to do so, and the client gives signed, informed written consent to the essential terms and the lawyer's role.

The opinion explains that before the 2003 amendments, former Rule 1.8(b) flatly barred a lawyer from a business transaction with a client for a fee or commission related to the representation; the current Rule 1.8(b) only bars using information relating to the representation to the client's disadvantage without consent. Although the flat prohibition is gone, the lawyer still has a duty to avoid conflicts created by his own personal interest (Rule 1.7(a)(2)). Rule 1.7(b) bars representing a client where the lawyer's professional judgment may be materially limited by his own interest, and Comment [10] warns a lawyer may not let related business interests affect the representation, such as referring clients to an enterprise in which the lawyer has an undisclosed financial interest. The lawyer's self-interest in his financial-services company must not distort his independent professional judgment (Rule 1.7; Rule 2.1).

The opinion notes the conflict's risks can be managed in most transactions if the lawyer makes the Rule 1.8(a) and Rule 1.7(b) disclosures and obtains informed written consent, and it cites the Oklahoma Bar Association's recommended written-disclosure elements for estate-planning clients (OK Bar Ass'n Ethics Op. 316 (2001)). The lawyer must first determine that his judgment will not be adversely affected by his profit interest (if he cannot, he should not refer the client), must independently determine the products would best serve the client's interests, and must fully disclose his personal interest before recommending them. To the extent the opinion differs from RPC 238, 2000 FEO 9, and 2001 FEO 9, those opinions are overruled.

In practice

Under the North Carolina rules as they stood at the time of the opinion, a lawyer may offer financial products and services to his legal clients through a separate ancillary business and be paid for them, provided the services are distinct from legal services and the client is made aware they are not legal services and carry no lawyer-client protections (Rule 5.7(a)(2)).

Per the opinion, referring a legal client to a lawyer-controlled ancillary business is a business transaction with a client governed by Rule 1.8(a), so the lawyer must disclose the terms and his role in writing, advise the client in writing to consider independent counsel, and obtain the client's signed informed consent. He must also avoid a personal-interest conflict under Rule 1.7(a)(2) and (b): he must first conclude in good faith that his judgment will not be impaired and that the products would best serve the client, and disclose his financial interest, before recommending them. The opinion overrules RPC 238, 2000 FEO 9, and 2001 FEO 9 to the extent they differ.

Common questions

Q: Can a lawyer sell financial products to his own clients and keep the commission?

A: Yes, after the 2003 amendments. The opinion concludes the old flat ban (former Rule 1.8(b)) is gone, so the lawyer may do so if he complies with Rules 5.7, 1.8(a), and 1.7.

Q: What does the client have to be told?

A: Under Rule 5.7, reasonable measures so the client knows the services are not legal services and lack lawyer-client protections; under Rule 1.8(a), written disclosure of fair terms and the lawyer's role, written advice to seek independent counsel, and signed informed consent.

Q: What conflict does selling products to clients create?

A: A personal-interest conflict under Rule 1.7(a)(2). The opinion concludes the lawyer's stake in selling products must not distort his independent judgment; he must conclude his representation will not be impaired and the product best serves the client (Rule 1.7(b), Rule 2.1).

Q: When should the lawyer not refer the client to his own business?

A: Per Rule 1.7(b)(1), the opinion concludes that if the lawyer cannot reasonably conclude his judgment will not be adversely affected by his profit interest, he should not refer the client to his financial-services company.

Q: Does this opinion change prior North Carolina guidance?

A: Yes. The opinion states it overrules RPC 238, 2000 FEO 9, and 2001 FEO 9 to the extent they differ from it.

Background and rules framework

The opinion applies North Carolina Rule 5.7 (responsibilities regarding law-related services, the analogue of Model Rule 5.7), including Rule 5.7(a)(2) and Comment [6], together with Rule 1.8(a) and Comment [1] (business transactions with a client), Rule 1.7(a)(2), Rule 1.7(b), and Comment [10] (personal-interest conflicts), and Rule 2.1 (independent professional judgment). It contrasts the current Rule 1.8(b) with the pre-2003 version that flatly barred fee- or commission-generating transactions related to the representation.

Citations and references

Rules of Professional Conduct:

• MR 5.7 / NC Rule 5.7, Rule 5.7(a)(2), Comment [6] (law-related services; notice that services are not legal services)
• MR 1.8 / NC Rule 1.8(a), Comment [1] (business transactions with a client); former Rule 1.8(b) (historical)
• MR 1.7 / NC Rule 1.7(a)(2), 1.7(b), Comment [10] (personal-interest conflicts)
• MR 2.1 / NC Rule 2.1 (independent professional judgment)

Other opinions cited:

• Oklahoma Bar Ass'n Ethics Op. 316 (2001): recommended written-disclosure elements when recommending financial products to a client.
• NC RPC 238; NC 2000 FEO 9; NC 2001 FEO 9 (overruled to the extent they differ from this opinion).

See also

• FL Bar Ethics Op. 02-8: Referral Fees, Ancillary Business
• NY State Bar Op. 755: Lawyer-Owned Side Business
• OH BPC Op. 94-007: Ancillary Law-Related Business

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2010-formal-ethics-opinion-13/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry:

Lawyer would like to establish an ancillary business that provides financial services to clients and non-clients. Services would include assistance in the selection, purchase, and disposition of securities, life insurance, and annuities. Lawyer would be compensated through consulting fees, investment advisory fees, and commissions. The ancillary services would be provided by an entity separate and distinct from the lawyer’s legal practice.

May Lawyer offer financial services to his legal clients and receive a fee or commission based on the provision of the financial services and the sale of financial products?

Opinion:

Yes. The ethical responsibilities for a lawyer who provides law-related services are set out in Rule 5.7. When law-related services are provided under circumstances that are not distinct from the provision of legal services, the law firm will be subject to all of the Rules of Professional Conduct with respect to the provision of the law-related services. If the law-related services are provided by a separate entity, the law firm will still be subject to the Rules of Professional Conduct unless the law firms takes "reasonable measures" to ensure that a person obtaining the law-related services knows that the services are not legal services and that the protections of the lawyer-client relationship do not exist. See Rule 5.7(a)(2).

Even when a lawyer provides law-related services through a separate entity, and takes the necessary measures to ensure that the consumer of the law-related services knows that the services are not legal services, the lawyer is still bound by the Rules of Professional Conduct as to the referral of his legal clients to the ancillary business. Comment [6] to Rule 5.7 provides that when a client-lawyer relationship exists with a person who is referred by a lawyer to an ancillary business controlled by the lawyer, the lawyer must comply with Rule 1.8(a) pertaining to business transactions with clients. See also Rule 1.8, cmt. [1]. Pursuant to Rule 1.8(a) a lawyer may only enter into a business transaction with a client if: (1) the transaction and terms are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client; (2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and (3) the client gives informed consent, in writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction. Accordingly, a lawyer must make these disclosures and secure the requisite consent before providing financial services and products to a client.

Prior to the 2003 amendments to the Rules of Professional Conduct, Rule 1.8(b) provided that “during or subsequent to legal representation of a client, a lawyer shall not enter a business transaction with a client for which a fee or commission will be charged in lieu of, or in addition to, a legal fee if the business transaction is related to the subject matter of the legal representation, any financial proceeds from the representation, or any information, confidential or otherwise, acquired by the lawyer during the course of the representation.” The current version of Rule 1.8(b) states only that a lawyer “shall not use information relating to representation of a client to the disadvantage of the client unless the client gives informed consent, except as permitted or required by these Rules.”

Although the previous prohibition on receiving fees or commissions for ancillary business transactions related to legal representation has been eliminated, when dealing with his legal clients, Lawyer has an ethical duty to avoid conflicts created by his own personal interests. See Rule 1.7(a)(2). Rule 1.7(b) provides that a lawyer shall not represent a client with respect to a matter if the lawyer’s professional judgment on behalf of the client may be materially limited by the lawyer’s own personal interest. Comment [10] to Rule 1.7 specifically states that a lawyer may not allow related business interests to affect representation, “for example, by referring clients to an enterprise in which the lawyer has an undisclosed financial interest.” The lawyer’s self-interest in promoting his financial services company must not distort his independent professional judgment in the provision of legal services to the client, including referring a client to the lawyer’s own ancillary business. Rule 1.7; Rule 2.1.

Although a conflict of interest exists in providing financial products to legal clients, the potential problems and risks can be avoided in most transactions if the lawyer makes the disclosures required by Rules 1.8(a) and 1.7(b), and obtains the client’s informed written consent. Rule 1.7(b) allows a lawyer to represent a client despite a conflicting personal interest if the lawyer reasonably believes his representation of the client will not be affected and the client gives written consent after disclosure of the existence and nature of the possible conflict and the possible adverse consequences of the representation. Prior to entering into a business transaction with a client, Rule 1.8(a) requires the lawyer to fully disclose the terms of the transaction to the client, including the lawyer’s role in the transaction, in a manner that can be reasonably understood by the client. In such circumstances, a client should have sufficient information from which to decide whether to enter into an ancillary business transaction with the client’s lawyer. Each transaction should be evaluated in accordance with its individual circumstances.

In recommending financial products to an estate-planning client, the Oklahoma Bar Association recommends that the lawyer include elements such as the following in a written disclosure to the client: (a) that the lawyer has a business and financial relationship with the financial services company; (b) whether the lawyer will receive a commission, fee, or other compensation from the sale of the financial product; (c) that the interests of the client and the interests of the financial services company and the lawyer, as an agent for the company, may be different and may conflict; (d) whether the lawyer or the financial services company is licensed to sell only certain types of financial products and, if so, why the lawyer is recommending the proposed product instead of other products in which he or she does not have a financial interest; (e) that if the client authorizes the lawyer to disclose confidential information in the course of obtaining the financial product, such disclosure may constitute a waiver of the client’s right to confidentiality based upon the lawyer-client relationship; (f) whether the financial services company is also the lawyer’s client; (g) that in the event a claim or controversy arises, the lawyer could be disqualified in representation of both the client and the company; and (h) that the client should consider seeking the opinion of independent counsel concerning the proposed transaction. See OK Bar Ass’n Ethics Op. 316 (2001).

Assuming that the financial services are provided under circumstances that are distinct from the provision of legal services, and Lawyer ensures that the consumer of the financial services knows that the services are not legal services, Lawyer may offer his financial services to his legal clients and receive payment for the services so long as he complies with the requirements set out in 1.8 and 1.7.

Lawyer must first determine that his professional judgment on behalf of the client will not be adversely affected by his personal interest in making a profit. If Lawyer cannot reasonably make such a determination, then the lawyer should not refer the client to his financial services company. See Rule 1.7(b)(1). Lawyer then must make an independent professional determination that the financial products and services offered by his company would best serve his client’s interests. Prior to recommending his financial services and products to the client, Lawyer must make full disclosure of his personal interest in the financial services company, as required by Rule 1.7(b) and Rule 1.8(a) so that the client can make a fully informed choice.

To the extent this opinion differs from RPC 238, 2000 FEO 9, 2001 FEO 9, those opinions are overruled.