Bar Rules

Formal Advisory Opinion No. 03-3

Ethics & Discipline / Advisory Opinions / Formal Advisory Opinions / Formal Advisory Opinion No. 03-3

STATE BAR OF GEORGIA
ISSUED BY THE FORMAL ADVISORY OPINION BOARD
PURSUANT TO RULE 4-403 ON JANUARY 6, 2004
FORMAL ADVISORY OPINION NO. 03-3


QUESTION PRESENTED:


    Is it ethically permissible for an attorney to enter into a "solicitation agreement" with a financial investment adviser under which the attorney, in return for referring a client to the adviser, receives fees based on a percentage of gross fees paid by the client to the adviser?

SUMMARY ANSWER:


    While it may be possible to structure a solicitation agreement to comply with ethical requirements, it would be both ethically and legally perilous to attempt to do so.  In addition to numerous other ethical concerns, Rule 1.7 Conflicts of Interest: General Rule, would require at a minimum that a "solicitation agreement" providing referral fees to the attorney be disclosed to the client in writing in a manner sufficient to permit the client to give informed consent to the personal interest conflict created by the agreement after having the opportunity to consult with independent counsel.  Comment 6 to Rule 1.7 provides: "A lawyer may not allow related business interest to affect representation by, for example, referring clients to an enterprise in which the lawyer has an undisclosed business interest."  Additionally, the terms of the "solicitation agreement" must be such that the lawyer will exercise his or her independent professional judgment in deciding whether or not to refer a particular client to the financial investment adviser.  Prudentially, this would require the lawyer to document each referral in such a way as to be able to demonstrate that the referral choice was not dictated by the lawyer's financial interests but by the merits of the institution to whom the client was referred.  The agreement must not obligate the attorney to reveal confidential information to the adviser absent the consent of the client; the fees paid to the attorney under the agreement must not be structured in such a way as to create a financial interest adverse to the client or otherwise adversely affect the client, and the agreement must itself be in compliance with other laws the violation of which would be a violation of Rule 8.4 Misconduct, especially those laws concerning the regulation of securities enforceable by criminal sanctions.  This is not an exhaustive list of ethical requirements in that the terms of particular agreements may generate other ethical concerns.

OPINION:


    "Anytime a lawyer's financial or property interests could be affected by advice the lawyer gives a client, the lawyer had better watch out." ABA/BNA Lawyers Manual on Professional Conduct 51:405.  In the circumstances described in the Question Presented, a lawyer, obligated to exercise independent professional judgment on behalf of a client in deciding if a referral is appropriate and deciding to whom to make the referral, would be in a situation in which his or her financial interests would be affected by the advice given.  This conflict between the obligation of independent professional judgment and the lawyer's financial interest is governed by Rule of Professional Conduct 1.7 which provides, in relevant part, that:

(A) A lawyer shall not represent or continue to represent a client if there is a significant risk that the lawyer's own interests . . . will materially or adversely affect the representation of the client . . . .

    The Committee is guided in its interpretation of this provision in these circumstances by Comment 6 to Rule 1.7:

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 interest.


    Under Rule 1.7, client consent to such a personal interest conflict is permissible after: "(1) consultation with the lawyer, (2) having received in writing reasonable and adequate information about the materials risks of the representation, and (3) having been given an opportunity to consult with independent counsel."  Thus, at a minimum, a "solicitation agreement" providing referral fees to the attorney would have to be disclosed to the client in writing in a manner sufficient to permit the client to give informed consent to the personal interest conflict created by the agreement after having the opportunity to consult with independent counsel.

     In addition to this minimum requirement, there are numerous other ethical obligations that would dictate the permitted terms of such an agreement.  The following obligations are offered as a non-exhaustive list of examples for the terms of particular agreements may generate other ethical concerns.

    1)  The agreement must not bind the attorney to make referrals or to make referrals only to the adviser for such an obligation would be inconsistent with the attorney's obligation to exercise independent professional judgment on behalf of the client in determining whether a referral is appropriate and to whom the client should be referred.  Both determinations must always be  made only in consideration of the client's best interests.  Prudentially, this would require the lawyer to document each referral in such a way as to be able to demonstrate that the referral choice was not dictated by the lawyer's financial interests but by the merits of the institution to whom the client was referred.  In order to be able to do this well the lawyer would need to stay abreast of the quality and cost of services provided by other similar financial institutions.

    2)  The agreement cannot restrict the information the attorney can provide the client concerning a referral by requiring, for example, the attorney to use only materials prepared or approved by the adviser.  Such a restriction is not only inconsistent with the attorney's obligations to exercise independent professional judgment but also with the attorney's obligations under Rule 1.4 Communications concerning the attorney's obligation to provide information to clients sufficient for informed decision making.

    3)  The agreement cannot obligate the attorney to provide confidential information, as defined in Rule 1.6 Confidentiality, to the adviser absent client consent.

    4)  The fees paid to the attorney for the referral cannot be structured in such a way as to create a financial interest or other interest adverse to the client.  Rule 1.8 Conflicts of Interest: Prohibited Transactions provides ". . . nor shall the lawyer knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client . . ."  

    5)  Finally, any such agreement would have to be in compliance with other laws the violations of which could constitute a violation of Rule 8.4 Misconduct.  For example, the agreement may not violate any of the legal or administrative regulations governing trading in securities enforceable by criminal sanctions.

    Thus, while it may be possible to structure a solicitation agreement to comply with ethical requirements, it would be both ethically and legally perilous to attempt to do so.


    The second publication of this opinion appeared in the August 2003 issue of the Georgia Bar Journal, which was mailed to the members of the State Bar of Georgia on August 7, 2003. The opinion was filed with the Supreme Court of Georgia on August 21, 2003. No review was requested within the 20-day review period, and the Supreme Court of Georgia has not ordered review on its own motion. In accordance with Rule 4-403(d), this opinion is binding only on the State Bar of Georgia and the person who requested the opinion, and not on the Supreme Court of Georgia, which shall treat the opinion as persuasive authority only.



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