Can a Georgia lawyer take a referral fee from a financial adviser for sending clients to that adviser?

Plain-English summary

The opinion addresses whether a lawyer may enter a "solicitation agreement" with a financial investment adviser under which the lawyer receives fees based on a percentage of the gross fees the client pays the adviser, in return for referring the client. The Board concludes that while it may be possible to structure such an agreement to comply with the rules, doing so would be both ethically and legally perilous.

The core problem is the conflict between the lawyer's duty to exercise independent professional judgment about whether and where to refer a client and the lawyer's own financial interest in making the referral. The opinion analyzes this under Rule 1.7, which bars representation where there is a significant risk that the lawyer's own interests will materially and adversely affect the representation, and quotes Comment 6's instruction that a lawyer may not refer clients to an enterprise in which the lawyer has an undisclosed interest. At a minimum, the agreement must be disclosed to the client in writing in a manner allowing informed consent to the personal-interest conflict, after the client has had an opportunity to consult independent counsel.

The opinion then lists, as a non-exhaustive set, additional requirements. The agreement may not obligate the lawyer to make referrals or to refer only to that adviser, because that would conflict with the duty of independent professional judgment exercised solely in the client's best interest; the opinion notes that prudentially the lawyer would document each referral to show it was driven by merit, not the lawyer's financial interest. The agreement may not restrict the information the lawyer gives the client (for example, by limiting the lawyer to adviser-approved materials), consistent with Rule 1.4. It may not obligate the lawyer to disclose confidential information to the adviser without client consent under Rule 1.6. The referral fees may not be structured to create an interest adverse to the client, consistent with Rule 1.8. And the agreement must comply with other laws, including securities regulations enforceable by criminal sanctions, whose violation could breach Rule 8.4.

In practice

The opinion holds that, under the Georgia rules as they stood at the time of the opinion, a lawyer who takes a percentage referral fee from a financial adviser creates a personal-interest conflict governed by Rule 1.7, and that the agreement is permissible only if it satisfies, at a minimum, written disclosure and informed consent with an opportunity to consult independent counsel. The opinion frames the additional conditions (no obligation to refer, no restriction on client communications, no compelled disclosure of confidences, no fee structure adverse to the client, and compliance with other law) as a non-exhaustive list, and characterizes the overall undertaking as ethically and legally perilous.

The opinion notes that Rule 1.7 was amended on November 3, 2011, to require that consent be informed, confirmed in writing, and preceded by a separate writing advising the client of reasonably available alternatives, but states that the amendment does not change its analysis or conclusion.

Common questions

Q: Can a Georgia lawyer accept a percentage of a financial adviser's fees for referring a client?

A: The opinion concludes such an arrangement is ethically and legally perilous. It may be possible to structure it lawfully, but at a minimum Rule 1.7 requires the lawyer to disclose the agreement in writing and obtain the client's informed consent to the personal-interest conflict, with a chance to consult independent counsel.

Q: Why is a referral-fee agreement a conflict of interest?

A: The opinion explains that the lawyer must exercise independent professional judgment about whether and to whom to refer a client, but a referral fee gives the lawyer a financial stake in the referral, creating a significant risk under Rule 1.7 that the lawyer's own interest will materially and adversely affect the representation.

Q: Can the agreement require the lawyer to refer only to that adviser?

A: No. The opinion states the agreement may not obligate the lawyer to make referrals or to refer only to the adviser, because that conflicts with the duty to decide referrals solely in the client's best interest.

Q: Can the lawyer share client confidences with the adviser under such an agreement?

A: Not without client consent. The opinion concludes the agreement may not obligate the lawyer to provide confidential information, as defined in Rule 1.6, to the adviser absent the client's consent.

Background and rules framework

The opinion interprets Georgia Rule of Professional Conduct 1.7 (conflict of interest: general rule, including Comment 6; Model Rule 1.7) as the controlling provision, and reads it together with Rule 1.4 (communication; Model Rule 1.4), Rule 1.6 (confidentiality; Model Rule 1.6), Rule 1.8 (prohibited transactions, including acquiring an interest adverse to a client; Model Rule 1.8), and Rule 8.4 (misconduct, including violations of other law; Model Rule 8.4). The Board notes the 2011 amendment to Rule 1.7 and states it does not affect the result.

Citations and references

Rules of Professional Conduct:

• Georgia RPC 1.7 (conflict of interest: general rule), including Comment 6 / Model Rule 1.7
• Georgia RPC 1.4 (communication) / Model Rule 1.4
• Georgia RPC 1.6 (confidentiality of information) / Model Rule 1.6
• Georgia RPC 1.8 (conflict of interest: prohibited transactions) / Model Rule 1.8
• Georgia RPC 8.4 (misconduct) / Model Rule 8.4

Other authority:

• ABA/BNA Lawyers' Manual on Professional Conduct 51:405

See also

• ABA Formal Op. 474: Referral Fees and Conflicts of Interest
• ABA Formal Op. 499: Passive Investment in Alternative Business Structures

Source

• Landing page: https://www.gabar.org/handbook?rule=rule534

Original opinion text

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

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

Rule 1.7 is recited in this opinion; however, Rule 1.7 was amended on November 3, 2011, and now indicates that consent to representation of two clients with potentially conflicting interests must be “informed” and “confirmed in writing,” and be preceded by a separate writing that also advises the clients of “reasonably available alternatives” to the representation. The amendment does not impact the analysis or conclusion reached in this opinion.

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.