Written Remarks of L. Harold Levinson - Center for Professional Responsibility

Written Remarks of L. Harold Levinson,
Professor of Law, Vanderbilt University; Member: ABA,
American Institute of Certified Public Accountants, American Association of Attorney-Certified Public Accountants

This statement reflects the author's personal views and should not be attributed to any of the organizations with which the author is connected.

March 31, 1999

I. SUMMARY OF RECOMMENDATIONS

This Commission should advise the ABA:

(1) To clarify the existing ABA standards regarding the ownership and independence of law firms;
(2) To consider adopting a new standard which would allow lawyers to place their licenses in inactive status, thereby giving up most of the rights and obtaining relief from most of the responsibilities of membership in the bar; and
(3) To create a task force (or other appropriate unit) to devote further consideration to the MDP issue, including measures to prepare the legal profession to deal effectively with this issue.

II. DISCUSSION

A. MDPs are not inevitable

Some witnesses at the Commission's hearings, and some commentators in the media, assume that the spread of MDPs to the United States is inevitable, and will involve some type of combined practice between lawyers and accountants. For people who take this position, the issue is not whether we should allow MDPs, but only how we should adapt to the MDP era.

I concede that some segments of the accounting profession are aggressively promoting the MDP movement, but I believe the future is still within the control of the courts, the legislatures and the legal profession, if they take timely action to assert their authority.

B. Keep existing ABA policy, because of lack of consensus for change

This Commission's hearings and inquiries have demonstrated that the legal profession is deeply divided on the MDP issue. In the absence of a consensus within the profession, the ABA should keep its existing policy. The Commission should therefore not recommend any ABA action which is inconsistent with existing policy. Since that policy is not clearly expressed in the Model Rules of Professional Conduct, the Commission should recommend amendments to clarify the Model Rules. A later section of this statement offers a package of clarifying amendments.

C. Keep existing policy, because it is sound

There is another reason, besides lack of consensus for change, why the ABA should keep its existing policy: The existing policy is sound.

1. Micro impact

The Commission has devoted substantial attention to considering the changes in rules and procedures that would be needed if MDPs were allowed. While there is room for disagreement, I assume that a suitable set of rules and procedures could be developed. I am by no means certain, however, that a mixture of law and accounting personnel in an MDP could effectively carry out these rules and procedures.

My concerns relate to the differences, between lawyers and accountants, in educational backgrounds, professional qualifications, responsibilities to clients, and images of themselves and their professional missions. These inter-professional differences may be more extreme in the United States than in some other countries. The ability of MDPs to function effectively in other countries is therefore no guarantee that they could work here.

If MDPs were allowed in the United States, I would perceive a significant risk, at the micro level of serving specific clients, that the quality of client service might decline, due in part to confused lines of managerial responsibility in the MDP.

2. Macro impact

As regards the macro impact of MDPs on the professions, the legal system and the public interest in general, I perceive a serious risk of irreversible damage. This risk, even without consideration of other factors, is sufficient to convince me that MDPs should not be allowed, except in conjunction with measures designed to eliminate or minimize this risk. My proposal regarding inactive bar membership, discussed later in this statement, is offered as a partial means of minimizing the risk. The design of additional measures should be an item on the agenda of the new ABA task force I propose.

The size of the major accounting firms, their history of engaging in aggressive acquisitions and mergers, and their penetration into the legal services markets in other countries, create a substantial risk that the accounting firms, if allowed to merge with law firms in the United States, would exert significant influence, not only on the combined firms themselves, but also on the legal profession in general. The accounting firms, in turn, might fall under the increasing influence of financial services companies, and of publicly held companies in general.

(a) Alternative Practice Structure

A few indicators are already visible. First, the American Institute of Certified Public Accountants (AICPA) issued Professional Ethics Interpretation 101-14, effective February 1999, on "The Effect of Alternative Practice Structure on the Applicability of the Independence Rules." Attached, as an appendix, is the full text of this interpretation, together with a related news story entitled "Ethics Keeps Up With New World Order," J. of Acctcy. (Feb. 1999) at 12-13, 82-83.

This AICPA interpretation is summarized as follows in the report submitted to this Commission by the American Association of Attorney-Certified Public Accountants:

[T]his interpretation portrays, without disapproval, a structure which results from a public entity's purchase of a CPA practice. The public entity has subsidiaries or divisions such as a bank, insurance company or broker-dealer, and it also has one or more professional service subsidiaries or divisions which offer non-attest services [generally speaking, services other than audits] to clients (such as tax, personal financial planning, and management consulting).

In connection with the acquisition, the partners of the old CPA firm form a new CPA firm to provide attest services [generally speaking, audits]. A majority of the owners of the new firm are CPAs, including the former owners of the old firm. The new firm provides attest services under the supervision of its owners. The agreement between the new firm and the public entity includes the lease of employees, office space and equipment; the performance of back-office functions such as billing and collections; and advertising. The new firm pays a negotiated amount for these services.

One can readily imagine a law firm occupying a similar position on the organization chart of a publicly held company and its subsidiaries or divisions.

(b) Big Five recruitment of lawyers

A second indicator is provided by information in the report dated January 8, 1999 of the Special Committee on Multi-Disciplinary Practice and The Legal Profession of the New York State Bar Association (on which the Association has not yet taken any position). The committee notes, at pp. 71-72, that the major accounting firms "have engaged in a surge of recruiting at both the entry level and, most noticeably, at the prestige level. The Big Five have successfully courted tax partners at leading law firms and senior IRS and Treasury officials." A footnote to the first sentence cites Boardman & Johnson, "Accounting for Competition," Legal Times (Feb. 3, 1997) for the information that 20 percent of recent graduating classes at New York University School of Law have been hired by the Big Five.

The committee adds: "[B]y hiring even more lawyers, the Big Five put themselves in a position to claim with ever greater force that they represent the interests of a substantial portion of the bar. This phenomenon was demonstrated in the evident angst of the Tax Section of the American Bar Association, in which lawyer-employees of accounting firms are heavily represented, in deciding its position on the IRS reform act [of 1998]." Id. at 73.

(c) Potential impact on independence of legal profession

In time, the influence of major accounting firms (or other owners of MDPs) could have an impact on the policies of the ABA, the selection of judges, the requirements for entry into the legal profession, the standards of conduct, fee arrangements, business practices, and so on. In some respects, the influence might be beneficial; in other respects, it might be harmful. But in any event, the influence would impair the independence of the legal profession. No doubt a few independent lawyers and law firms would remain, but their influence over the policies and standards of the legal profession would be minimal. In the long run, the public interest would suffer.

The independence of the legal profession is an important feature of American social and political life. As noted in the NYSBA committee report:

The independent bench and bar historically and today are the primary institutions for preserving individual liberty and civility against government oppression, and it is the mission of the legal profession "to participate in the constant improvement of society's legal system and to make that system readily accessible to society." Id. at 24 (footnote omitted).

(d) Decreased competition

In addition to jeopardizing the independence of the legal profession, MDPs would likely lead to a reduction in the number of law firms, resulting in decreased choice for consumers and decreased competition among providers. Again, the public interest would suffer.

D. Amend the rules to facilitate compliance with and enforcement of existing ABA policy
The ABA should amend its rules to facilitate compliance with and enforcement of existing ABA policy. See Part III.

E. Consider adopting a standard which would allow lawyers to elect inactive status
The ABA should consider adopting a standard which would allow lawyers to place their licenses in inactive status. See Part IV.

F. Promote compliance with and enforcement of the rules, as amended
The ABA, through a new task force or other appropriate unit, should promote compliance with and enforcement of the rules, as amended. See Part V.

G. Prepare for competition in all arenas
The ABA, through a new task force or other appropriate unit, should help the legal profession to prepare to face unprecedented challenges, not only in client service, but also in the legislative, regulatory and public opinion arenas. See Part V.

 
III. PROPOSED AMENDMENTS TO MODEL RULES OF
PROFESSIONAL CONDUCT

I propose a number of amendments to the ABA Model Rules of Professional Conduct. These amendments are designed to clarify existing policy, in order to facilitate compliance and enforcement.

A summary of the proposed amendments is set forth below, followed by the proposed full text (in bill-drafting form).

SUMMARY OF PROPOSED AMENDMENTS TO ABA MODEL
RULES OF PROFESSIONAL CONDUCT

Terminology

New definitions are provided for "law practice," "practice of law," and "unauthorized practice of law." A conforming amendment is made to the definition of "'firm' or 'law firm.'"

"Law practice" The first of the newly defined terms is "law practice." This term is already used (without definition) in Rule 1.17, Sale of a Law Practice. According to the new definition, a "law practice" is (in summary) an enterprise in which lawyers engage in the "practice of law."

"Practice of law" "Practice of law" is also newly defined. The definition is comprehensive, including many activities which can lawfully be performed by nonlawyers. This definition is crucial to understanding the term "practice of law" in existing Rule 5.4; see proposed new comments to that rule.

"Unauthorized practice of law" Next, "unauthorized practice of law" is defined to mean the practice of law by a person who, in view of the facts and circumstances, is not legally authorized to do so. This definition recognizes that nonlawyers are authorized to engage in some areas of the practice of law (tax services, for example), but not in others. This definition clarifies Rule 5.5, Unauthorized Practice of Law.

"'Firm' or 'Law firm'" Finally, a technical amendment is made to the existing definition of "'firm' or 'law firm,'" with the result that a "law practice" is one type of "law firm." Thus the defined terms retain the expansive notion of "law firm" for purposes of the rules on conflict of interest, while using the more limited term "law practice" for purposes of other rules, notably Rule 1.17 on sale of a law practice, proposed new Rule 1.18 on merger of law practices, and Rule 5.4 on independence of lawyers.

Rule 1.17, Sale of a Law Practice

Rule 1.17 is amended to add one more condition to be satisfied in any sale of a law practice: Every partner in the practices of the purchaser and the seller must be in compliance with Rules 5.4 and 5.5 immediately before the sale. In addition, technical amendments bring Rule 1.17 into conformity with the new Terminology.

Rule 1.18, Merger of Law Practices

A new Rule 1.18 is added. It imposes essentially the same conditions on the merger of law practices as Rule 1.17 imposes on the sale of a law practice, including the requirement (added by the proposed amendment to Rule 1.17) that all parties must be in compliance with Rules 5.4 and 5.5 immediately before the merger.

Rule 5.4, Professional Independence of a Lawyer

Rule 5.4 is amended by the addition of two new paragraphs. New paragraph (e) prohibits a law practice from participating in an alliance, agreement or relationship which is likely to impair the professional independence of the law practice. This paragraph is intended to prevent de facto impairments of the independence of a law practice.

New paragraph (f) preserves the right of lawyer to practice any other profession in which the lawyer is licensed and regulated. This paragraph is appropriate, since the new definition of "practice of law" (see Terminology) extends to many types of services that are lawfully offered by nonlawyers. Paragraph (f) means, for example, that a lawyer who is also licensed and regulated as a certified public accountant may practice in a firm in which nonlawyer CPAs have ownership interests, provided the lawyer performs only those services which nonlawyer CPAs are allowed to perform, such as tax services. This provision reflects existing ABA policy, and experience has shown that it poses no significant risk, either at the micro level of serving clients, or at the macro level regarding the independence of the legal profession.

The comment to Rule 5.4 is amended by the addition of four new paragraphs. One of the new paragraphs explains the new paragraph (e) of the rule, and another explains the new paragraph (f) of the rule.

The other new paragraphs in the comment to Rule 5.4 explain how the rule applies to areas, such as tax practice, in which nonlawyers are authorized to engage. The essential point is that tax service is a type of the practice of law (see new definition in Terminology); and CPAs are authorized to engage in this type of practice of law (pursuant to federal statute and IRS rules); but Rule 5.4 prohibits lawyers from engaging in this or any other type of practice as partners or employees of nonlawyers, even if the nonlawyers are CPAs who are themselves authorized to engage in that practice. These paragraphs note, however, that new paragraph (f) preserves the right of a lawyer to practice another profession in which the lawyer is licensed and regulated; see new paragraph of comment on new paragraph (f) of the rule.

Rule 5.5, Unauthorized Practice of Law

Rule 5.5 is clarified by the addition of new language in the comment, indicating that a lawyer may not serve as "ghost writer" for a nonlawyer, nor allow the use of the lawyer's name in connection with services which were performed substantially by a nonlawyer.

FULL TEXT OF PROPOSED AMENDMENTS TO ABA MODEL
RULES OF PROFESSIONAL CONDUCT

Terminology

Amend [3] "Firm" or "law firm" denotes a lawyer or lawyers in a private firm law practice, lawyers employed in the legal department of a corporation or other organization and lawyers employed in a legal services organization. See Comment 1.9.

Add [11]* "Law practice" denotes a business enterprise
in which one or more lawyers engage in the practice of law
by performing services, as independent contractor,
for at least two clients who are unrelated to the law
practice and to each other.

Add [12]* "Practice of law" denotes the performance, for another person, of any of the following services: (a) representation before a judicial, legislative, executive, administrative or other governmental official or body, or before a government-owned body, or before an arbitrator or similar body; (b) preparation or review of documents involving the transfer of substantial interests in property, liberty or other rights or interests; or (c) any other service (including but not limited to advice or negotiation) which a reasonable person, in view of the facts and circumstances, would expect to require the knowledge, skill and judgment of a person trained in the law.

Add [13]* "Unauthorized practice of law" denotes the practice of law by a person who, in view of the facts and circumstances, is not legally authorized to do so.

* [Alphabetize all definitions, and renumber as needed]

[Amend] Rule 1.17, Sale of a Law Practice

A lawyer or a law firm practice may sell or purchase a law practice, including goodwill, if the following conditions are satisfied:

(a) The seller ceases to participate in any law practice engage in the private practice of law [in the geographic area] [in the jurisdiction] (a jurisdiction may elect either version) in which the seller's law practice has been conducted;
(b) The practice is sold as an entirety to another lawyer or law firm practice;
(c) Every partner in the seller's and purchaser's practice, immediately before the sale, is in compliance with Rules 5.4 and 5.5;
[Retain and renumber the remaining paragraphs, so that "(c) Actual written notice . . . " becomes "(d)," etc.]

Comment

[Add new paragraph [2], and retain and renumber existing paragraphs]

[2] In order to preserve the independence of the legal profession, all parties to the sale of a practice must themselves be independent, as prescribed by Rules 5.4 and 5.5.

[Add new rule] Rule 1.18 Merger of Law Practices

Two or more law practices may merge into a single practice, if the following conditions are satisfied:

(a) Each practice is merged as an entirety;
(b) Every partner in each practice, immediately before the merger, is in compliance with Rules 5.4 and 5.5;
(c) Before the merger is finalized, each law practice gives written notice to each of its clients, regarding:

(1) The proposed merger;
(2) The terms of any proposed change in the fee arrangement authorized by paragraph (d);
(3) The client's right to retain other counsel or to take possession of the file; and
(4) The fact that the client's consent to the merger will be presumed if the client does not take any action or does not otherwise object within ninety (90) days of receipt of the notice.

If the client cannot be given notice, the representation of that client may be transferred to the merged practice only upon entry of an order so authorizing by a court having jurisdiction. The practice which has represented that client may disclose to the court in camera information relating to the representation only to the extent necessary to obtain an order authorizing the transfer of a file.

(d) The fees charged to clients shall not be increased by reason of the merger. The merged practice may, however, refuse to undertake the representation unless the client consents to pay the merged practice fees at a rate not exceeding the fees charged, prior to the merger negotiations, by other practices in the merged practice, for rendering substantially similar services.

Comment

Mergers of law practices should comply with similar standards to those set forth in Rule 1.17 regarding the sale of law practices.

Rule 5.4 Professional Independence of a Lawyer

[Add new paragraphs]

(e) A law practice shall not participate in an alliance, agreement or relationship which is likely to impair the professional independence of the law practice.

(f) This Rule does not prevent a lawyer from practicing

another profession in which the lawyer is licensed and

regulated by a governmental agency.

Comment

[Identify existing comment as [1], and add new paragraphs to follow it]

[2] As used in paragraph (b), the "practice of law" includes the performance of legal services which nonlawyers are authorized by federal statute to perform, such as federal tax services. See Terminology. This paragraph therefore prohibits a lawyer from forming a partnership with a nonlawyer, even if the partnership's only activity is providing federal tax services to clients. But see comment to paragraph (f).

[3] Similarly, paragraph (d) prohibits a lawyer from providing federal tax services while practicing with a corporation or other association owned partly by nonlawyers, even if the nonlawyers are authorized by federal statute to perform such services. But see Comment to paragraph (f) of this rule, and Comment to Rule 5.5.

[4] Paragraph (e) prevents a law practice from participating in various types of arrangements which are likely to impair its professional independence. Examples include agreements for mutual referral of clients, commitments to represent future clients, lease of the practice, and outsourcing of substantial services.

[5] Paragraph (f) preserves the right of a lawyer to practice any other profession in which the lawyer is licensed and regulated. For example, a lawyer who is also licensed as a certified public accountant is allowed, by this paragraph, to form a partnership with nonlawyer CPAs or to practice in a CPA firm owned by nonlawyers, even if the activities of the nonlawyers fall within the definition of the "practice of law" (see Terminology), provided the lawyer's activities in the practice are limited to those that may properly performed by nonlawyer CPAs, such as tax services.

 Rule 5.5 Unauthorized Practice of Law

Comment

[Add new sentences before last sentence of existing comment]

However, paragraph (b) prohibits a lawyer from performing substantially all of the legal services, as an undisclosed "ghost writer" for a nonlawyer. Paragraph (b) also prohibits a lawyer from allowing the use of the lawyer's name and credentials in connection with legal services which were performed substantially by a nonlawyer, unless the lawyer performs a thorough review and engages in appropriate contact with the client.

 

IV. PROPOSED STANDARDS FOR LAWYER'S ELECTION
OF INACTIVE STATUS

A. Rationale

Some law graduates decide not to seek admission to the bar, so that they can pursue career interests without being regulated as members of the bar. And some members of the bar resign their membership for similar reasons.

The present proposal provides another option for lawyers who wish to give up most of the rights and responsibilities of bar membership for an indefinite period of time, while retaining the option of regaining those rights and reassuming those responsibilities later in their careers.

The proposal arises in the context of the MDP debate and, in particular, in view of the significant number of lawyers who have become associated with accounting firms. The proposal might be limited to lawyers in that position, or might be broadly available to lawyers who have other reasons for electing inactive status, such as service in some types of public office.

Micro risk to quality of client service

One purpose of the proposal is to reduce the risk of confusion regarding the standards that would apply when a law-trained person works for an accounting firm. This proposal would relieve the lawyer of most standards of the bar, so that the lawyer could follow the standards of the accounting firm. Of course employers and clients would have to be fully advised of this system. In addition, the ABA and other organizations would be obliged to assist in educating the public on the differences between active and inactive lawyers, with special emphasis on the protections clients would give up by dealing with inactive lawyers -- protections such as the attorney-client privilege and the rules on conflict of interest.

Macro risk to independence of legal profession

Another purpose of the proposal is to reduce the risk that the legal profession might lose its independence because of the large numbers of lawyers who are associated with accounting firms (or other enterprises). The proposal would prevent inactive lawyers from participating in the governance of the legal profession. Consequently, the governance of the profession would be in the hands of active licensees -- those who accept the full package of regulations that apply to the bar. The ABA's primary mission would then be to promote the interests of active licensees and, through them, the public interest. This development might cause, at least temporarily, a decline in ABA membership. I assume the ABA would not allow the potential loss of members to outweigh considerations of the public interest.

B. Proposed Standards

As noted above, these standards may be limited to lawyers who wish to be associated with accounting firms (or other firms governed by professional standards which provide substantial protection to clients and the public), or the standards may be made broadly applicable to any lawyers wishing to conform to them.

A lawyer should be allowed, at any time, to elect inactive status. (Other language may be used instead, such as "voluntary licence suspension," or "limited licensure," or "restricted licensure," etc.)

The election must be made in writing, to each state and federal jurisdiction in which the lawyer is licensed.

Upon becoming inactive, the lawyer continues to be governed by lawyers' standards regarding past events; for example, the lawyer is still bound by the requirements of privilege and confidentiality regarding information received from clients in the past. The lawyer must wind up any practice in which the lawyer has been involved, and must divest any interest in any law practice.

As regards future activities, the lawyer loses virtually all rights and is relieved of virtually all responsibilities. The inactive lawyer has no more authority than a layperson to engage in the practice of law. (See proposed new Terminology for definition of "practice of law.") The inactive lawyer has no right to participate in the governance of the bar. The inactive lawyer has a right to reinstate the active license, upon meeting certain requirements, including demonstrating knowledge of the rules of professional conduct.

The following outline suggests, in more detail, the elements of the proposed inactive status.

The inactive lawyer is relieved of most responsibilities, but is still bound by:

1. Transitional duties, such as the duties:

(a) to maintain the privileged and confidential nature of information received during active practice,

(b) to notify all existing clients that the lawyer's license has become inactive, and to explain the significance of this change,

(c) to notify all courts in which the lawyer is currently counsel of record, and to conform to the courts' orders in connection with pending matters,

(d) to notify all clients and other persons for whom the lawyer holds money or other property in trust, and to cooperate in arrangements to return the money or property to the clients or other beneficial owners, or to transfer it to active members of the bar, under appropriate court supervision,

(e) to divest any interest in any law practice, and

(f) in general, to wind up the lawyer's participation in any law practice.

2. Ongoing duties, such as the duties:

(a) to advise future employers and clients that the lawyer's license is inactive, and to explain the rights and duties of inactive status, including the fact that communications with the inactive lawyer are not covered by attorney-client privilege or confidentiality,

(b) to comply with the appropriate state equivalents of some of the ABA Model Rules of Professional Conduct, such as the following:

1.2(d) A lawyer shall not counsel or assist a client to engage in crime or fraud;

4.1 Truthfulness in Statements to Others;

7.1 Communications Concerning a Lawyer's Services;

7.2 Advertising;

7.3 Direct Contact with Prospective Clients;

7.4 Communication of Fields of Practice and Certification;

7.5 Firm Names and Letterheads;

8.1 Bar Admission and Disciplinary Matters;

8.2 Judicial and Legal Officials;

8.3 Reporting Professional Misconduct;

8.4 Misconduct (but amending paragraph (a) so as to incorporate only those rules listed above);

8.5 Disciplinary Authority: Choice of Law.

Further, the inactive lawyer may not become or remain a partner or part owner of a law practice.

Notably, the inactive lawyer is not governed by the following rules:

1.6 Confidentiality of Information;

1.7 - 1.12 Conflict of Interest;

5.4 Professional Independence of a Lawyer.

The inactive lawyer is therefore free, within the above limits, to participate in a multidisciplinary practice. For example, an inactive lawyer who participates in an accounting practice may conform to the accountants' standards of conduct, except where prohibited by the short list of lawyers' rules that apply to the inactive lawyer.

  

V. PROPOSED CREATION OF ABA TASK FORCE

This Commission should recommend creation of a task force (or other appropriate unit) within the ABA, with appropriate funding and staff support, to perform the following functions:

A. Cooperate with state courts and bar associations in:

(1) promoting state adoption of ABA rules, as amended,

(2) monitoring compliance with ABA policies and state rules,

(3) monitoring developments inside and outside the legal profession that threaten to impair compliance with ABA policies and state rules,

(4) recommending and promoting developments in the legal profession to improve its ability to compete with other professions.

B. Exercise authority, subject to fast-track approval by appropriate levels of the ABA, to file briefs, engage in lobbying, conduct or coordinate public relations campaigns, and perform other functions in support of ABA policies and state rules.

C. Participate in all activities of the ABA (including the Center for Professional Responsibility) which appear relevant to the MDP issue.

D. Maintain current information about regulatory issues in other professions that appear relevant to the MDP issue.

E. Discuss matters of common concern with representatives of other professions.

F. Submit periodic progress reports to the ABA President, Board of Governors and House of Delegates, including recommendations for any appropriate changes to ABA policies.

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