99-09: Conflicts of Interest; Business Tranactions with Client; Business Activities; Financial Planning

9/1999

A lawyer may offer securities and insurance services to his legal clients if he stringently complies with all of the requirements in ER 1.7(b) and 1.8(a) in assuring that: 1) the legal representation will not be adversely affected by the ancillary services; 2) the terms in the ancillary business transaction are “fair and reasonable” to the client; 3) the terms are fully disclosed in writing to the client; and 4) the client gives informed consent in writing. [ER 1.7(b), 1.8(a)]

FACTS[1]

 

The inquiring attorney practices exclusively in the area of estate planning.  In addition to being licensed to practice law, the attorney holds insurance and securities licenses, and is a registered investment advisor. He is not presently involved in the sale of securities or insurance.  The attorney wishes to know whether, in addition to drafting wills and trusts and providing related legal services to his clients, for which he would be paid an hourly or flat-rate fee, he may, under applicable ethical rules, also broker securities and insurance products to those clients, for which he would be paid a commission on each sales transaction.  The attorney anticipates that his brokerage activities would include assisting his clients in restructuring their investments, for example, by purchasing or selling stocks, bonds, and mutual funds, and in selling them insurance products, such as annuities or life insurance policies.  The attorney believes that by providing “one-stop” estate planning and related investment services, he would be providing a valuable client service.  He acknowledges that brokering securities and insurance products to his clients could create a conflict of interest, which he would address through disclosure and client consent.

 

Questions Presented

 

1.              Is it ethically proper for an attorney, in the course of providing estate planning services to existing clients, to also provide those clients with securities and insurance brokerage services, for which the attorney would receive a commission?[2]

 

2.         Can the conflicts inherent in those multiple services be adequately addressed through disclosure and client consent?

 

Relevant Ethical Rules

 

ER 1.7             Conflict of Interest: General Rule

 

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(b)               A lawyer shall not represent a client if the representation of that client may be materially limited by…the lawyer’s own interests, unless:

 

(1)               the lawyer reasonably believes the representation will not be adversely affected; and

 

(2)               the client consents after consultation.

 

ER 1.8             Conflict of Interest: Prohibited Transactions

 

(a)                A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:

 

(1)               the transaction and the terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;

 

(2)               the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

 

(3)               the client consents in writing thereto. 

 

Relevant Ethics Opinions

 

The Committee has, on several occasions, considered whether a lawyer may simultaneously practice law and engage in non-legal business activities.  We did so most recently in Opinion 97-08, which summarized the Committee’s prior opinions on the ethical propriety of engaging in ancillary businesses, as well as ethics opinions from other jurisdictions on the subject.  In that Opinion, we concluded that, “although operating dual professions is fraught with potential problems, there is no express prohibition against such an arrangement.”  Op. 97-08 at 6.  We cautioned, however, that this is a “daunting task” and that lawyers who engage in ancillary business activities will be held to a very high standard, which “involves paying particular attention to conflicts of interest, exercising independent legal judgment, fully disclosing any adverse relationships, avoiding fee-splitting or solicitation and protecting confidentiality.”  Id. (internal citation omitted)

 

None of the Committee’s opinions on ancillary businesses have considered whether, in the context of an estate planning practice, a lawyer may also engage in brokering securities or insurance products to his or her clients.[3]  Ethics committees in other jurisdictions have, however, considered similar questions and have reached different results.

 

One of the first ethics committees to consider the issue was the New York State Bar Association’s Committee on Professional Ethics.  In a 1991 opinion, the Committee concluded that, under the Model Code, an estate-planning attorney ethically was prohibited from selling insurance products to his clients through a financial planning business that would have a separate office in the same building as his law office.  N.Y. State Bar Assoc. Comm. On Professional Ethics Op. 619 (March 14, 1991)[4]. The Committee reasoned that, because an estate planning lawyer is called upon to advise a client how best to satisfy the client’s financial needs through such means as purchasing insurance, the independent professional judgment of a lawyer who wished to sell insurance to a client “would unavoidably be affected in considering the appropriateness of or recommending life insurance products for a particular client.”  Id. at 1.  The Committee went on to conclude that such a conflict of interest could not be addressed through disclosure and client consent because “the opportunity for overreaching by the lawyer is too great to be tolerated.” Id. at 2.

 

Relying on the New York State Bar Association’s ethics opinion, the Rhode Island Supreme Court Ethics Advisory Panel has concluded that an attorney engaged in estate planning, who was also a licensed insurance broker, could not, under the Model Rules, ethically sell life insurance products to his estate planning clients.  R.I. Supreme Court Ethics Advisory Panel Op. 96-26 (November 14, 1996). 

 

The Panel concluded that the conflicts of interest inherent in those activities were too great to be adequately addressed through disclosure and client consent under ER 1.7 and ER 1.8:

 

As a practical matter, consultation and disclosure, which are properly and fully carried out, would not in most cases result in the client’s consent.  Aside from the practical considerations, however, the panel does not believe that there could be meaningful consent by the law client where the estate-planning lawyer has a separate interest in selling insurance.  The client is entitled to rely on, and the lawyer is obligated to provide, independent professional judgment.  The opportunity for overreaching by the lawyer is substantial.  The panel therefore concludes a lawyer may not solicit or accept a client’s consent to such a direct and substantial conflict between the client’s interest and the lawyer’s interest…

 

Id. at 2.

 

A different approach has been taken by ethics committees in Illinois and Utah.  In an opinion issued shortly after the New York State Bar Association’s Committee on Professional Ethics issued its Opinion 619, the Illinois State Bar Association concluded that an attorney who practiced primarily in the areas of estate planning and probate work and was also licensed to sell insurance and securities, could sell insurance and investment products to his clients, so long as he obtained the clients’ informed consent under ER 1.8.  Ill. State Bar Assoc. Advisory Op. 90-32 (May 15, 1991).  The Opinion relied on previous opinions in which the Association had approved the practice of lawyers carrying on dual professions from the same office; it did not explicitly address the conflicts of interest unique to an estate planning practice that the New York State Bar Association’s Committee on Professional Ethics had highlighted in its Opinion.  The Association cautioned that “dual profession lawyers must take special care to insure that the interest of their legal clients are not compromised for the sake of the lawyers’ other enterprises.” Id. at 2.

 

In its Opinion 146A, the Utah State Bar’s Ethics Advisory Committee concluded that a lawyer who was also a licensed life insurance agent, could, in the course of providing legal services to his existing legal clients, also sell them insurance products, so long as he complied with ER 1.8.[5]  The Committee considered, but rejected the position taken by the New York State Bar Association’s Ethics Advisory Committee, relying instead on a Michigan ethics opinion, which concluded that a lawyer could sell insurance products to his clients so long as the requirements of ER 1.8 were met.  State Bar of Michigan Standing Committee on Professional and Judicial Ethics Op. RI-135  (May 28, 1992).  The Utah Committee cautioned that a lawyer who chooses to sell insurance to his clients faces a “substantial burden of showing that his legal advice (or omission of advice) was free from any bias or conflict of interest created by the dual capacities in which the lawyer acted.”  Utah State Bar Ethics Advisory Op.146A at 2.

 

Ethics committees in South Carolina and California have considered a similar question; Whether attorneys involved in estate planning work may, under ER 1.8, receive a commission for referring clients to an insurance broker or agency.  In its Opinion 90-16, the South Carolina Bar’s Ethics Advisory Committee was asked to consider whether partners in a law firm that provided estate planning services to its clients could ethically form a life insurance agency in which they would have at least a fifty percent ownership interest and then refer clients of the law firm to the agency after full written disclosure. The Committee concluded that the arrangement might be ethically permissible under ER 1.8 but would, as a practical matter, be difficult to carry out in light of the disclosures required under the rule.  S.C. Bar Ethics Advisory Comm. Op. 90-16 (October 1990).

 

The California State Bar’s Standing Committee on Professional Responsibility, in its Formal Opinion 1995-140, considered whether an estate-planning attorney who referred clients to an insurance agent could ethically receive rebates or commissions on any policies the agent sold to the attorney’s clients.  Like the New York Committee, the California Committee recognized the conflicts of interest unique to an estate-planning lawyer having a financial interest in insurance products sold to his or her clients.  Id. at 2.  The Committee concluded, however, that the lawyer could ethically advise a client to purchase an insurance policy and receive a commission for referring the client to the insurance agent who sold the client the insurance policy, but only if the lawyer: (1) concluded that he could competently advise the client under the circumstances; (2) made full written disclosure of all relevant circumstances, including actual and foreseeable consequences of the arrangement; (3) obtained informed written consent from the client; and (4) advised the client to seek independent legal counsel. Id. at 1.

 

Opinion

 

While we recognize that there are significant potential conflicts of interest inherent in the brokerage of securities and insurance products by estate planning lawyers to their clients, in keeping with our previous opinions,[6]the Committee concludes that the Rules of Professional Conduct do not expressly prohibit a lawyer from engaging in such ancillary business activities so long as the requirements of ER 1.7(b) and ER 1.8(a) are met.  We hasten to add that compliance with the stringent disclosure and consent requirements of those rules may, as a practical matter, be difficult to accomplish and that an estate planning attorney who decides to engage in those activities will assume a substantial burden of showing that his or her independent professional judgment has in no way been compromised by a financial interest in the securities or insurance procedures they broker to their clients.

 

ER 1.7(b)

 

As a threshold matter, an estate planning lawyer contemplating brokering securities or insurance products to his or her clients must conclude, under ER 1.7(b), that his or her representation of the client in estate planning matters will not be adversely affected by the lawyer’s financial interest in the sale of those products.  If, as result of the lawyer’s financial interest, the lawyer cannot objectively evaluate the client’s needs or the alternatives available to meet the client’s needs, the lawyer may not offer those ancillary business services.

 

ER 1.8(a)

 

Because the estate planning lawyer who wishes to broker securities or insurance products to his or her client has a financial interest in the sale of those products, the disclosure and consent requirements of ER 1.8(a) must be met.  They include the following:

 

1.                  The proposed transaction must be “fair and reasonable” to the client;

 

2.                  the proposed transaction and its terms must be “fully disclosed and transmitted in writing to the client in a manner which can reasonably be understood by the client”;

 

3.                  the client must be given a “reasonable opportunity to seek the advice of independent counsel in the transaction”; and

 

4.                  the client must consent in writing.

 

Fairness and Reasonableness

 

An estate planning attorney who wishes to broker securities or insurance products to his or her estate clients faces a substantial burden of showing that each such transaction is fair and reasonable to the client.  See Calif. State Bar Standing Comm. on Professional Responsibility Op. 1995-140 at 6; Utah State Bar Ethics Advisory Comm. Op.146A.  “The transaction must be as beneficial to the client as it would have been had the client been dealing with a stranger rather than with his lawyer.”  In re Neville, 147 Ariz. 106, 113, 708 P.2d 1297, 1304 (1985).  Among the factors that might be considered in determining the fairness and reasonableness of a transaction are:

 

Ø      whether the client would pay a higher premium or commission if they obtained securities or insurance products or services from someone other than the lawyer;

 

Ø      whether the purchase of securities or insurance products is in the client’s best interests;

 

Ø      whether other investments or insurance products are available from other providers that meet the client’s needs; and

 

Ø      whether the compensation to the lawyer is reasonable under the circumstances.

 

See Calif. State Bar Standing Comm. on Professional Responsibility Op. 1995-140 at 6.  This list of fairness and reasonableness factors is not exhaustive.  “Suffice to say that it will be up to the lawyer to demonstrate that the client was not taken advantage of in any way.” Id.

 

Disclosure

 

As for disclosure, ER 1.8 requires “not only a full explanation of the divergence in interest between the lawyer and the client…but also a detailed explanation of the risks and disadvantages to the client which flow from the agreement” and disclosure of “every fact and circumstance which the client should know to make an intelligent decision concerning the wisdom of entering into the agreement.”  In re Neville, 147 Ariz. at 113, 708 P.2d at 1304 (internal citations omitted); see, also, Ariz. Op. 94-15 at 6.  “The rule is strict. The lawyer must give the client that information which he would have been obliged to give if he had been counsel rather than interested party…” In re Neville, 147 Ariz. at 113, 708 P.2d at 1304.

 

A list, which is by no means exclusive, of some of the matters that should be disclosed to the client to whom an estate planning attorney wishes to broker securities or insurance products would include:

 

Ø      All of the facts relating to the lawyer’s relationship with a particular securities firm, mutual fund, or insurance company whose products he might sell, such as:

 

Ø      The amount of commission the lawyer will receive and when he will receive it;

 

Ø      The amount of the premium or commission the brokerage firm, mutual fund, or insurance company might receive from the transaction; and

 

Ø      The nature of the lawyer’s contractual relationship with securities or insurance firms whose products the lawyer might sell.

 

Ø      Whether comparable securities or insurance products are available from other sources and their relative cost;

 

Ø      All of the reasonably foreseeable adverse consequences of the transaction, including:

 

Ø      The fact that the lawyer’s potential compensation from the arrangement may potentially interfere with the lawyer’s independent judgment on behalf of the client;

 

Ø      That the lawyer’s compensation arrangement might cause him to recommend the purchase of securities or insurance where it might not be appropriate; and

 

Ø      That the client might not obtain as good a deal by purchasing securities or insurance products or services from the attorney than if it obtained them from another source.

 

See Calif. State Bar Standing Comm. on Professional Responsibility Op. 1995-140 at 6; S.C. Bar Ethics Advisory Comm. Op. 90-16 (October 1990).

 

ER 1.8’s disclosure requirements must be stringently complied with even if the transaction is fair and reasonable. Ariz. Op. 94-15 at 6 (citing In re Weiner, 120 Ariz. 349, 352, 586 P.2d 197 (1978)).

 

Independent Counsel and Client Consent

 

ER 1.8 requires that the client, before giving his or her consent to engage in a business transaction with a lawyer, must be given a reasonable opportunity to seek independent counsel.  The comment to the Rule suggests that “a review by independent counsel on behalf of the client is advisable.”  Under the proposal suggested by the Inquiring Attorney, it may be indispensable.  As the Arizona Supreme Court noted in a disciplinary case involving an attorney who provided investment advice to a client:

 

We wish…to emphasize that when a lawyer receives a personal benefit apart from the client’s fee from a transaction in which he represents a client, the lawyer’s ethical obligation is not always fulfilled by merely disclosing the existence of the personal stake, explaining the potential consequences, and obtaining the client’s consent.  There is an inherent potential for a conflict of interest in such situations, and the lawyer must always ensure that his or her personal interest does not interfere with the unfettered exercise of professional judgment the client is entitled to expect under the circumstances.  The best way to achieve this, of course, is to see that the client has independent advice.

 

In re Breen, 171 Ariz. 250, 254, 830 P.2d 462, 466 (1992).

 

Thus, to fulfill his or her obligations under this portion of ER 1.8, an estate planning attorney who wishes to broker securities or insurance products to his or her clients should affirmatively encourage those clients to obtain the advice of independent counsel, and not merely casually suggest that they consult with another lawyer.  See Calif. State Bar Standing Comm. on Professional Responsibility Op. 1995-140 at 7. (“[I]t is simply not enough to advise the client to seek some ‘second opinion.’ Clients must be advised to seek truly independent counsel.”).  While this may be at odds with the Inquiring Attorney’s goal of providing “one-stop” services to his clients, nothing less is required by ER 1.8.  See Ariz. Op. 94-15 (“Providing the client with the opportunity to obtain the advice of outside counsel serves two important objectives: (1) it assures that the client has time to consider the transaction and that the lawyer is not applying undue pressure on the client; and (2) an independent adviser can bring an objective eye to the proposed arrangement.”).

 

Conclusion

 

We conclude that the Inquiring Attorney is not ethically prohibited from offering securities and insurance brokerage services to his clients. He may do so, however, only through stringent compliance with the requirements of ER 1.7(b) and ER 1.8(a).