Can a Texas lawyer who is regularly hired by a financial planning company accept that company's referrals of its customers as new clients?
Texas Ethics Opinion 641: Client Referrals From a Financial Planning Company That Is Also the Lawyer's Client
Short answer: Per the Committee, a lawyer regularly engaged by a financial planning company may accept the company's referral of its customers for matters unrelated to the customer's financial or investment dealings with the company, but generally may not, even with consent, represent a referred customer where the matter involves financial or investment services or the customer's dealings with the company; and the lawyer may never give the company anything of value in exchange for referrals.
Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the Texas Disciplinary Rules of Professional Conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.
About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. The opinion text is reproduced at the bottom; the official source (linked) controls.
Plain-English summary
The opinion considers a lawyer who is regularly engaged by a financial planning company ("Company A") that sells securities and life insurance products to its customers. The lawyer's engagement for Company A does not include serving Company A's customers, and the lawyer also represents other clients. Company A proposes to refer some of its customers to the lawyer when they need legal services.
The opinion analyzes the arrangement under Rule 1.06(b)(2), which bars representation that "reasonably appears to be or become adversely limited by the lawyer's or law firm's responsibilities to another client or to a third person or by the lawyer's or law firm's own interests." Because the lawyer is regularly engaged by Company A, the opinion concludes that the lawyer's ability to represent a Company A customer is limited whenever the matter involves the customer's dealings with Company A or any investment products Company A recommended or sold, both because of the lawyer's responsibilities to Company A and because of the lawyer's own interest in keeping Company A as a regular client. The opinion gives the example that the lawyer could not give unbiased advice on whether the customer should use Company A or a competitor, and notes the conflict would be acute if the customer needed to assert a claim against Company A. By contrast, where the matter does not involve Company A's products or the customer's dealings with the company, the opinion concludes there is generally no conflict under Rule 1.06(b)(2).
Where a conflict does exist, the opinion turns to Rule 1.06(c), which permits representation only if the lawyer reasonably believes each client's representation will not be materially affected and each affected client consents after full disclosure. Applying that two-step test, the opinion concludes that the lawyer normally will not be able to represent both the customer and Company A when the matter involves financial or investment services or the customer's dealings with Company A, because in almost all such cases the lawyer cannot reasonably form the required belief; so the lawyer generally should not accept those referrals even with both consents. The opinion adds that, for matters the lawyer may take, the lawyer remains bound by Rule 2.01 (independent professional judgment and candid advice) and Rule 5.04(c) (not permitting a recommender to direct the lawyer's professional judgment).
Finally, the opinion concludes under Rule 7.03(b) and (c) that the lawyer may not give Company A anything of value in exchange for referrals or as a means of soliciting clients, which means the lawyer may not provide legal services to Company A for a reduced fee or on otherwise favorable terms in exchange for the referrals.
In practice
Under this opinion, and under the Texas rules as they stood in 2014, the permissibility of the referral arrangement turns on the subject matter of each referred representation. The opinion holds that referrals for matters unrelated to the customer's financial or investment dealings with the company are generally permissible, while referrals for matters involving the company's products or the customer's dealings with the company generally are not, even with both clients' consent, because the lawyer usually cannot reasonably believe the dual representation will not be materially affected. The opinion also holds that the lawyer's regular engagement by the company may not be structured as a transfer of value (such as a reduced fee) in exchange for referrals. The opinion makes clear that each particular representation must be individually evaluated.
Common questions
Q: Can a Texas lawyer take client referrals from a company that is also the lawyer's regular client?
A: Per Opinion 641, generally yes for matters unrelated to the customer's financial or investment dealings with the company; generally no, even with consent, where the matter involves the company's products or the customer's dealings with the company.
Q: Why can't consent cure the conflict for investment-related matters?
A: The opinion concludes that in almost all such cases the lawyer cannot reasonably believe the representation of each client will not be materially affected, so the threshold requirement of Rule 1.06(c)(1) is not met and consent under 1.06(c)(2) cannot save the representation.
Q: Can the lawyer give the company a discount in exchange for the referrals?
A: No. The opinion concludes that Rule 7.03(b) and (c) prohibit giving the company anything of value for referrals, which includes providing legal services to the company at a reduced fee or on favorable terms in exchange for referrals.
Q: What other duties apply to the matters the lawyer may accept?
A: The opinion identifies Rule 2.01 (exercising independent professional judgment and rendering candid advice) and Rule 5.04(c) (not permitting a person who recommends the lawyer to direct or regulate the lawyer's professional judgment).
Background and rules framework
The opinion interprets Texas Disciplinary Rule of Professional Conduct 1.06, the general conflict-of-interest rule. Rule 1.06(b)(2) bars representation that reasonably appears to be adversely limited by the lawyer's responsibilities to another client or third person or by the lawyer's own interests, and Rule 1.06(c) sets the conditions (reasonable belief plus informed consent) for proceeding despite such a conflict. The opinion also applies Rule 2.01 (independent professional judgment and candid advice), Rule 5.04(c) (a recommender may not direct the lawyer's professional judgment), and Rule 7.03(b) and (c) (no giving anything of value for soliciting or referring clients). In the ABA Model Rules, the conflict standard corresponds to Model Rule 1.7, the independence-of-judgment provisions to Model Rules 2.1 and 5.4(c), and the payment-for-referrals limits to Model Rule 7.2.
Citations and references
Rules of Professional Conduct:
- MR 1.7 (concurrent conflicts of interest)
- MR 2.1 (independent professional judgment; candid advice)
- MR 5.4 (professional independence of a lawyer)
- MR 7.2 (payment for recommending a lawyer's services)
- Texas Disciplinary Rules 1.06(b)(2), 1.06(c), 2.01, 5.04(c), 7.03(b), 7.03(c)
See also
- ABA Formal Op. 474: Referral Fees and Conflicts of Interest
- CA COPRAC Op. 2002-159: Attorney Referral to a Broker for Loan-Funded Fees
Source
- Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-641/
- Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_641.pdf
Original opinion text
Reproduced from the official source for research purposes. The linked source is authoritative.
QUESTION PRESENTED
Do the Texas Disciplinary Rules of Professional Conduct permit a lawyer to accept client referrals from a financial planning services company that regularly engages the lawyer to provide legal services to the company?
STATEMENT OF FACTS
A lawyer is regularly engaged by a financial planning services company ("Company A") to provide legal representation and advice. Company A offers financial planning services, including selling securities and life insurance products, to its customers. Under the terms of the lawyer's engagement with Company A, the lawyer's work for Company A does not include providing legal services to Company A's customers. In his law practice, the lawyer represents other clients in addition to Company A. Company A proposes to refer to the lawyer from time to time customers of the company who need legal services.
DISCUSSION
The referral arrangement described above involves conflict of interest issues governed by Rule 1.06 of the Texas Disciplinary Rules of Professional Conduct. Rule 1.06(b)(2) provides that a lawyer shall not represent a person if that representation "reasonably appears to be or become adversely limited by the lawyer's or law firm's responsibilities to another client or to a third person or by the lawyer's or law firm's own interests."
Since the lawyer is regularly engaged to provide legal services for Company A, the lawyer's ability to separately represent and advise a customer of Company A will be limited if the representation involves the customer's dealings with Company A or any investments or investment products recommended or sold to the customer by Company A. The limitations on the lawyer's ability to represent Company A's customers in those situations arises from the lawyer's responsibilities to Company A as well as from the lawyer's own interest in maintaining Company A as a regular client. Comment 4 to Rule 1.06 cautions that
"[l]oyalty to a client is impaired … in any situation when a lawyer may not be able to consider, recommend or carry out an appropriate course of action for one client because of the lawyer's own interests or responsibilities to others. The conflict in effect forecloses alternatives that would otherwise be available to the client."
Comment 5 to Rule 1.06 also cautions that "[a] lawyer should not allow related business interests to affect representation . . . ."
In providing legal advice to a customer of Company A, the lawyer may find himself limited in his ability to advise the client because the lawyer is not able to provide independent advice on matters relating to Company A. For example, the lawyer could not provide unbiased advice on whether the customer of Company A should use Company A or a competitor for investment services and products. The conflict of interest problem would arise in an acute form if the interests of a customer of Company A might require the assertion of a claim against Company A. The provision of legal services to a customer of Company A with respect to investment services and products of Company A thus necessarily involves a conflict of interest within the scope of Rule 1.06(b)(2) since the representation of the customer of Company A in these circumstances would reasonably appear to be limited by the lawyer's responsibilities to Company A and by the lawyer's own interest in continuing to provide services to Company A. In contrast, if the representation of the customer of Company A did not involve investment services and products or an issue involving Company A, then in most cases there would not be a conflict under Rule 1.06(b)(2).
Where an actual or potential conflict of interest under Rule 1.06(b)(2) exists, the conflict of interest would not preclude representation of a customer of Company A if the lawyer is able to comply with the requirements of Rule 1.06(c), which provides as follows:
"A lawyer may represent a client in the circumstances described in (b) if:
(1) the lawyer reasonably believes the representation of each client will not be materially affected; and
(2) each affected or potentially affected client consents to such representation after full disclosure of the existence, nature, implications, and possible adverse consequences of the common representation and the advantages involved, if any."
Applying Rule 1.06(c) requires a two-step analysis. First, the lawyer must reasonably determine whether his proposed representation of the customer of Company A while he continues to regularly represent Company A will materially affect the lawyer's representation of either the customer or Company A. Second, if the lawyer reasonably believes that neither the representation of the customer nor the representation of Company A will be materially affected, both the customer and Company A must consent after full disclosure. Each specific representation would have to be evaluated based upon the specific facts involved. However, the Committee is of the opinion that the lawyer will not normally be able to represent both the customer and Company A if representation of the customer involves financial or investment services generally or the customer's dealings with Company A because in almost all cases the lawyer will not be able to reasonably form the belief that the representation of each client will not be materially affected. Generally, therefore, the lawyer should not accept referrals of customers of Company A, even with the consent of both the customer and Company A, when the representation of the customer involves financial or investment services in general or the customer's dealings with Company A in particular. In contrast, while each particular representation would have to be individually evaluated, if the lawyer who regularly provides legal representation to Company A restricted his representation of customers of Company A to matters that did not involve financial and investment issues in general and the customer's dealings with Company A in particular, such representations generally would not involve prohibited conflicts of interest.
For legal matters where the lawyer is not prohibited by the conflict of interest rules from representing a customer of Company A, the lawyer will of course remain subject to all other requirements of the Texas Disciplinary Rules. In these circumstances, important requirements to be considered include the lawyer's obligation under Rule 2.01 to exercise independent professional judgment and render candid advice to his client and the lawyer's obligation under Rule 5.04(c) not to permit a person who recommends the lawyer to direct or regulate the lawyer's professional judgment on behalf of his client.
In the evaluation of the circumstances presented, it should be noted that the lawyer is prohibited from giving anything of value to Company A in exchange for referrals of prospective clients or as a means of soliciting prospective clients. Rule 7.03(b) and (c) provide in pertinent part as follows:
"(b) A lawyer shall not pay, give, or offer to pay or give anything of value to a person not licensed to practice law for soliciting prospective clients for, or referring clients or prospective clients to, any lawyer or firm . . . .
(c) A lawyer, in order to solicit professional employment, shall not pay, give, advance, or offer to pay, give, or advance anything of value, other than actual litigation expenses and other financial assistance . . ., to a prospective client or any other person . . . ."
These provisions would thus preclude the lawyer from providing legal services to Company A for a reduced fee or on otherwise favorable terms in exchange for the company's referral to the lawyer of prospective clients.
CONCLUSION
The Texas Disciplinary Rules of Professional Conduct would generally not prohibit a lawyer from accepting client referrals from a financial planning services company that also regularly engages the lawyer for legal representation if the lawyer's representation of the company's customers involves only matters unrelated to financial and investment issues or the customer's dealings with the company. However, the Texas Disciplinary Rules would generally prohibit the lawyer from accepting representation of a customer of the company involving financial and investment issues or the customer's relationship with the company. In all cases, the lawyer's regular engagement as a lawyer by the financial planning services company is not permitted to be on terms that would constitute a transfer of something of value to the company in exchange for the company's referral of clients to the lawyer.
Tex. Comm. On Professional Ethics, Op. 641 (2014)