Can a lawyer accept a referral or solicitor's fee from an investment advisor for sending clients to the advisor?

Plain-English summary

An investment advisory firm proposed a program in which it would pay North Carolina lawyers a referral or solicitor's fee, calculated as a percentage of the advisory fee, for referring clients to the firm. The lawyer's role would be limited to giving the client program materials, introducing the client to the advisor's personnel and attending explanatory meetings, and receiving copies of the client's periodic statements. The arrangement was structured to comply with the federal Investment Advisers Act and the North Carolina Securities Act.

The opinion concluded a North Carolina lawyer could not accept such a fee. Although securities law might permit the payment under certain conditions, the opinion reasoned that the Revised Rules of Professional Conduct impose a higher standard: a lawyer must exercise independent professional judgment when referring a client to a third party for services related to the subject of the representation, and a referral fee from that third party impairs, or may impair, that judgment under the then-current Rule 1.7(b). The opinion concluded written disclosure to the client would not neutralize the potential for the lawyer's self-interest to impair the lawyer's judgment, and it noted that earlier opinions reached consistent results (CPR 241 barred a lawyer who did a client's estate planning from selling that client insurance, and RPC 238 permitted a firm to provide financial planning only if no one affiliated with the firm earned a commission).

Currency note

This opinion was issued in 1999, before North Carolina's adoption of the 2003 revisions to the Rules of Professional Conduct, and it cites the rule numbering then in effect (the conflict provision was then Rule 1.7(b)). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Could a lawyer take a referral fee from an investment advisor for sending clients there?

A: No. The opinion concluded the referral fee impaired the lawyer's independent professional judgment about whether to refer the client, so the lawyer could not accept it.

Q: Would disclosing the fee to the client make it acceptable?

A: No. The opinion concluded written disclosure could not neutralize the potential for the lawyer's self-interest to impair the lawyer's professional judgment.

Q: Did it matter that securities law allowed the payment?

A: No. The opinion concluded that even if the Investment Advisers Act permitted the payment, the Rules of Professional Conduct imposed a higher standard that the arrangement did not meet.

Background and rules framework

At the time, the opinion applied North Carolina's Rule 1.7(b), which addressed a lawyer's exercise of independent professional judgment where the lawyer's own interests could materially limit the representation. In current numbering the subject matter corresponds to Model Rule 1.7 (conflicts of interest, including a lawyer's personal-interest conflict).

Citations and references

Rules of Professional Conduct:

• N.C. Rule 1.7(b) (then in effect): independent professional judgment / personal-interest conflict
• Current counterpart: Model Rule 1.7 (conflicts of interest)

Other opinions cited:

• CPR 241: lawyer who did estate planning for a client should not sell that client insurance
• RPC 238: firm may provide financial planning only if no affiliated person earns a commission

See also

• ABA Formal Op. 474: Referral Fees and Conflicts of Interest
• NC State Bar 2003 FEO 10: Sharing Fees With a Nonlawyer Referral Source

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/99-formal-ethics-opinion-1/

Original opinion text

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

Inquiry:

An investment advisory firm (the "investment advisor"), registered under the Investment Advisor's Act of 1940 (the "Advisor's Act") and qualified to provide investment advisory services in North Carolina under the North Carolina Securities Act, is contemplating a program in which the investment advisor will pay a referral or solicitor's fee to attorneys in North Carolina for referring clients to the investment advisor. The fee paid will be a percentage of the fee paid by the client to the investment advisor for investment advisory services. The investment advisor contemplates that the attorney's involvement will be limited to (1) providing clients with material describing the investment program, (2) introducing the client to the investment advisor's registered personnel and attending meetings at which the investment advisor's personnel explain the investment program to the client and assist the client in choosing the investment advisory services that best fit the client's needs, and (3) receiving copies of the client's periodic investment advisory statements.

The Securities and Exchange Commission has taken the position that persons providing solicitation services for a fee will not be required to register as an investment advisor under the Advisor's Act if the investment advisor who provides the services is in compliance with Rule 206(4)-3 (the "rule") of the Advisor's Act. The rule provides that a cash payment may be paid by the registered investment advisor to a solicitor if (1) the solicitor is not subject to a "statutory disqualification" under the Advisor's Act and (2) the referral or solicitation fee is paid pursuant to a written agreement which describes the solicitor's activities and the compensation for those activities, contains a solicitor's understanding to perform those duties under the agreement consistent with the investment advisor's instructions and the Advisor's Act, and requires the solicitor, at the time of any solicitation, to provide the client with a copy of the investment advisor's brochure (a disclosure document containing background information about the investment advisor and the compensation to be paid) and a separate written disclosure document that sets out certain information about the investment advisor, the solicitor, and the arrangement. The investment advisor must receive from the client a signed and dated acknowledgment showing that the client received the separate written disclosure document and the investment advisor must make a bona fide effort to ascertain that the solicitor complied with the terms of the agreement between the parties.

The investment advisor and attorneys participating in the program will comply with the Advisor's Act and the North Carolina Securities Act. May a North Carolina attorney accept a referral fee or "solicitor's fee" from the investment advisor for referring clients to the investment advisor?

Opinion:

No. Although the law may permit such payments under certain circumstances, the Revised Rules of Professional Conduct impose a higher standard of conduct. A lawyer must exercise independent professional judgment on behalf of a client when referring a client to a third party for services related to the subject matter of the legal representation. See Rule 1.7(b). If a lawyer will receive a referral fee from the third party, the lawyer's professional judgment in making the referral is or may be impaired. Written disclosure to the client will not neutralize the potential for the lawyer's self-interest to impair his or her judgment. Other ethics opinions are consistent with this holding. CPR 241 rules that a lawyer who sells insurance should not sell insurance to clients for whom he has done estate planning. Similarly, RPC 238 permits a law firm to provide financial planning services provided no commission is earned by anyone affiliated with the firm.