Can a law firm represent the underwriters in a securities offering when the issuer picks and pays the firm, and can it also represent the issuer?

Plain-English summary

Frequent securities issuers often designate a single law firm to represent the underwriters across multiple offerings (a "Designated Underwriters' Counsel"). By definition the firm represents the underwriters, but the issuer selects the firm and pays its fees, sometimes before the underwriters are even chosen. The committee was asked whether the firm may also perform legal work for the issuer.

The committee addresses two situations. Where the firm does no work for the issuer, the fact that the issuer pays the firm's fees does not create a disabling conflict: lawyers are commonly retained where a third party pays (an insurer paying defense counsel is the classic example, citing N.Y. State 721), and DR 5-107(A) and (B) expressly contemplate third-party payment. The duty of independent professional judgment continues. The Code requires the client's consent after full disclosure before the lawyer accepts third-party compensation; underwriters usually understand the designated-counsel arrangement, so their consent is generally implicit, but the firm must disclose any material facts beyond the ordinary designation (for example, that the firm regularly represents the issuer or has a personal or family relationship with an issuer's officer) that might bear on its judgment.

Where the firm also represents the issuer, the firm holds two clients (underwriters and issuer) whose interests can diverge, for example when negotiating the underwriting agreement or deciding what is material for disclosure. The firm must assess, under the DR 5-105 disinterested-lawyer test, whether it can competently represent both, and if so obtain the informed consent of the affected clients; the opinion notes that screening the two sets of lawyers may be part of the arrangement, but consent is effective only if the disinterested-lawyer test is met. The committee concludes the firm must carefully evaluate its relationship with the selecting company and ensure the underwriters properly consent.

In practice

The opinion holds, under the former Code as it stood at the time, that issuer selection and payment of underwriters' counsel does not by itself disqualify the firm: third-party payment is permitted under DR 5-107 with client consent after full disclosure, and repeated engagements do not change that. It frames dual representation of underwriters and issuer as a DR 5-105 concurrent-conflict question, permissible only where a disinterested lawyer would conclude the firm can competently represent each and the affected clients give informed consent. The committee stresses disclosure of any material relationship beyond the ordinary designated-counsel role.

Common questions

Q: Does it create a conflict that the issuer chooses and pays the underwriters' lawyer?

A: Not by itself. The committee concludes third-party payment is permitted under DR 5-107(A) and (B), so long as the client (the underwriters) consents after full disclosure, and the duty of independent professional judgment continues despite the issuer paying the fees.

Q: Do the underwriters have to give express consent?

A: Usually their consent is implicit, because underwriters generally understand the designated-counsel arrangement. But the committee states the firm must disclose any material facts beyond the ordinary designation, such as a regular or family relationship with the issuer, that might bear on its judgment.

Q: Can the same firm also represent the issuer?

A: Sometimes. The committee concludes the firm may represent both only where a disinterested lawyer would conclude under DR 5-105 that it can competently represent each client, and the affected clients give informed consent; screening may be part of the arrangement but does not replace the disinterested-lawyer test.

Background and rules framework

The opinion interprets DR 5-107(A) and (B) (compensation from and influence of a third-party payor, the analogue of ABA Model Rule 1.8(f) and 5.4(c)), DR 5-105 (declining or continuing multiple employment and its disinterested-lawyer consent test, the analogue of ABA Model Rule 1.7), and DR 5-101(A) (the lawyer's own-interest conflict). It draws on the Municipal Securities Rulemaking Board's guidance and SEC shelf-registration practice as background, not as rules.

Citations and references

Rules of Professional Conduct:

• MR 1.7 (concurrent conflicts); MR 1.8 (third-party payment of fees); MR 5.4 (professional independence)
• Former Code DR 5-107(A), (B); DR 5-105(A), (B), (C); DR 5-101(A)

Other opinions cited:

• N.Y. State 721 (1999): the client is the policyholder, not the insurer paying defense counsel

See also

• NY State Bar Op. 825: EAP third-party payor legal services by phone
• NY State Bar Op. 826: Representing and opposing the same insurance carrier

Source

• Landing page: https://nysba.org/ethics-opinion-818/