ABA COMMISSION ON MULTIDISCIPLINARY PRACTICE
February 12, 2000
Mr. Chairman and members of the Commission: I am pleased to appear before you again, eleven months after I presented my testimony to you in Washington. I said then that your work may profoundly affect the American legal system and the society it serves, and I repeat that now. I also repeat my expression of admiration for your undertaking this burdensome task.
I will not repeat my statement of background and credentials which appear in my testimony of March 12, 1999 and which you have posted on your web site. By this reference I incorporate my prior testimony in full as well as the Comment on your June 8, 1999 Report and Recommendation which I submitted to you on July 21, 1999 and which you have also posted on your web site. 1
The Commission's June 8 Report and Recommendations (hereinafter the "Report") took some steps which, in my judgment, were positive and worthy. It recommended that every MDP that includes the rendition of legal services within its orbit should, on a full MDP firm-wide basis, be subject to the legal profession's current rules that protect the core values of confidentiality and client loyalty (thus banning conflicts of interest even as to clients of the MDP for whom no legal services are being rendered currently). I am pleased to say that those were among the positions that I urged strongly when I appeared before you last March. I also urged then that you endorse fully the need for maintenance of the core value that requires lawyers to exercise independent legal judgment. You did endorse that value, but as I noted in my Comment of July 21, 1999, I thought that your statement was phrased weakly and somewhat naively. 2 My hope is that in your next report you will reiterate your position on independence in terms that will not permit easy avoidance, although that may prove to be impossible if you should continue in your endorsement of MDPs that are not lawyer-controlled and managed, but more of this later.
The Commission's Report sets forth a proposed definition of legal services, of services to be performed only by lawyers. It is to be commended for doing so. Heretofore definition has been left largely to the common law evolution of case law, with state-by-state differences and many gaps. I hope that the Commission will preserve that aspect of its last Report for its next.
There were two values which I and others previously urged you to embrace, but which your Report did not , i.e., lawyer competence and non-affiliation with accountants who are performing the attest function for a client for whom legal or advocacy services are to be provided. Your Report ignored competence and stated that the question of the compatibility of the attest function with legal representation and advocacy was only for the SEC. I was pleased to see, however, that in your Update, posted online on December 15, 1999, you indicated that your next report would correct for both omissions.
My principal concern with your Report goes not to the omissions I have just noted or to any particular difference in choice of words, but to the more fundamental question of management and control of the firm that directly or indirectly owns and controls a law practice. I and others have expressed a willingness to see the traditional rules changed that now, as in the past, prohibit fee sharing with non-lawyers, indeed changes that would sanction the formation of MDPs with lawyers and non-lawyers in partnership with each other, to perform legal and non-legal personal services, provided that the lawyers retain financial and managerial control. 3 Your Report, however, would permit any non-lawyer controlled personal service firm, PricewaterhouseCoopers (PwC), for example, to buy, own, and control Paul Sax's firm (Orrick, Herrington & Sutcliffe) or even Bob Mundheim's firm (Shearman & Sterling), and would permit Ernst & Young (E&Y) to arrange for de jure ownership of what now may be only de facto ownership of McKee Nelson Ernst & Young. Pip-squeak though the McKee firm is, mid-sized though Orrick is, and large though S&S is, they would be mere drops in the buckets of PwC and E&Y.
The issue, of course, is what position the American Bar Association should take with regard to the Model Rules. Although your Report had been on last August's agenda of the House of Delegates for a possible up or down vote, or something in between, the Commission itself moved that action be tabled for consideration at a later date, presumably at its meeting here, this month, in Dallas. By a vote of 3 to 1, however, the House adopted a substitute motion offered by the Florida delegation, short and to the point, and it is in the light of the House's Resolution that the Commission continues it work and that it meets here today. The Resolution provides:
RESOLVED, that the American Bar Association make no change
or amendment to the Model Rules of Professional Conduct which
permits a lawyer to offer legal services through a multidisciplinary
practice unless and until further study demonstrates that such changes
will further the public interest without sacrificing or compromising
lawyer independence and the legal profession's tradition of loyalty
to clients. (emphasis mine)
It seems clear that the Resolution expects the Commission to report back with recommendations for Rules changes that will permit MDPs only when it (1) has shown that the "changes will further the public interest," and (2) that the changes will be effected "without sacrificing or compromising lawyer independence and the legal profession's tradition of loyalty to clients." The Resolution calls for the Commission to provide facts, not merely a rewriting of its prior report with better verbal attention to the core values, to show that the "changes will further the public interest." To the extent that client desire is relevant, the Commission must not continue to ignore the most comprehensive survey on the subject, published in London's Commercial Lawyer on June 21, 1998. 4 Contrary to the implications of the one-stop shopping slogan, that survey of the 350 largest British corporations shows that 88 percent do not want an amalgamation of their now independent lawyers and accountants. This was the view expressed independently of each other by both the chief legal officers and the chief financial officers of the corporations surveyed. Although the Commission has seemed thus far to ignore that survey, it has recently taken note of a more current but somewhat less comprehensive survey by the Financial Times. That survey reports that two-thirds of the respondents oppose lawyer-accountant MDPs, but, as the Commission highlights, 50 percent of the respondents said that if, in order to continue with their existing lawyers and accountants after their firms had merged, they had to accept the MDP, they would do so. Presumably, the other 50 percent would change their representation rather than accept the loss of independent legal and accounting service providers. The Commission has had the time to conduct its own, objective, statistically valid survey of American legal clientele. To my knowledge it has not done so. I hope that it will. It would provide a datum that is not seen by the Commission to be irrelevant.
We know from the SEC and from undisputed press accounts, those in the Wall Street Journal and the New York Times, for example, that PwC, the largest of the Big Five, is in gross, flagrant violation of the SEC rule in effect since 1933 that prohibits the accountants in a firm that certifies a client's financial statement to own stock in that company. The report is that 85% of PwC's partners were in violation of that prohibition. The immediate response from a PwC spokesman and from a Deloitte & Touche commentator as well was that the report shows that the rules need to be changed. After all, a Big Five spokesman said that the rules had been rejected when put to the AICPA for adoption in 1931; they're merely the rules of the SEC. These immediate responses, if nothing more, should give serious pause to our entrusting the care and control of the legal profession to those who have demonstrated such indifference to the law and such lack of fidelity to long established ethical norms and values as the Big Five have. To be sure, just days ago the AICPA announced that the SEC's rules on the subject of ownership of client stock will now be its rules, an acknowledgment almost 70 years late in coming. And one can only wonder whether the AICPA has been stimulated by the fact that this Commission is sitting, here and now, and that the SEC is conducting investigations of the practices of the other Big Five firms, PwC having been only the first.
In an effort to determine what the "public interest" requires, in addition to conducting a survey such as I have suggested, I recommend that the Commission seek to determine carefully and objectively what in fact the control and operating relationships are between the lawyers and the non-lawyers in the Big Five firms. We are in effect told that the Big Five has presented us with a fait accompli, that we already have accountant-controlled MDPs with thousands of lawyers, both partners and employees, and that therefore the Commission should urge their legitimation. That at least calls for a factual examination of what the lawyers in fact do in the Big Five, what their relationship is with the non-lawyers, who calls what shots, what the modus operandi is as to confidentiality, conflict-of-interest, competence assurance, and independence of legal judgment. Surely the Big Five would not object to or inhibit your objective, detailed, and careful inquiries, nor would they fail to provide you with the documents you sought or prevent your talking to whomever you wished. Without such inquiry how can the American Bar Association and the American public know whether the public interest requires that the Big Five be permitted to own and operate law firms?
There has been a great deal of Ballyhoo about the significance, the precedent making significance, of the affiliation between Ernst & Young and Bill McKee and Bill Nelson and their colleagues, once again, a fait accompli. Yet the public has no real idea of the nature of the affiliation. We are told that the firm name, McKee Nelson Ernst & Young is lawful as a trade name, but that Ernst & Young is but a financier in the transaction, not a partner or joint venturer. In the same breath, however, E&Y tells us that now they have a firm in which their clients will be able to receive legal services. Neither the lawyers nor the accountants have been willing to make public their underlying documents, even in redacted form with the dollar amounts deleted. The press releases and interviews have emphasized that E&Y has no equity interest in the firm, notwithstanding the misleading implication of the firm name to the contrary. They insist that E&Y has merely financed the start-up, so-called independent law firm. But they will not divulge the terms of the so-called "financing." We all know that the law looks behind mere labels to discover the substance of privately structured arrangements. The label of "debt" has long been penetrated to see if it is but a cover for equity. McKee and Nelson and their co-author Whitmire have described the state of the law succinctly and accurately in their treatise, Federal Taxation of Partnerships and Partners.
An arrangement that lacks economic substance or business reality is a sham
and is not recognized for any tax purposes. Par.3.02[b].
A little later, dealing with a decided case, the book says correctly
Even if an unconditional promise is made to repay an advance at a time certain
or on demand, debt-equity principles may apply to characterize a 'loan' as equity.
Thus, an ostensible loan to a partnership without adequate security or pursuant
to noncommercial terms may be characterized as equity and the lender may be
treated as a partner. Par. 3.03.
The principle of substance-over-form which underlies the McKee-Nelson-Whitmire statements in their treatise is not limited to tax cases, and I've not heard that the doctrine is inapplicable either to Bill McKee or to E&Y, or to any other lawyers or accountants when it comes to the law and ethics of legal practice. Surely McKee and E&Y would allow the Commission to examine their constitutive documents, and the Commission should do so. The Commission's job is not to police, but it is to find out what is happening, and not to base its findings on speculation or surmise.
Much has been made of the presence of non-lawyer controlled MDPs in Europe. The impression given is that they are a great success, serving the public interest and with benefit to all. On November 12, 1999, however, the CCBE (the consultative organization of the Bar organizations of the European Union and other European States) met in Plenary in Athens, and it has cast grave doubt on any such conclusion. I submitted a copy of the CCBE Report to the Commission in December, and I hope that it will take it into account as part of a careful, factual analysis of the MDP conditions in Europe. The CCBE Report concludes with these important statements:
CCBE ... concludes that, in the jurisdictions with which it is familiar, the
problems inherent to integrated co-operation between lawyers and
non-lawyers with substantially differing professional duties and corres-
pondingly different rules of conduct, present obstacles which cannot be
adequately overcome in such a manner that the essential conditions for
lawyer independence and client confidentiality are sufficiently safeguarded,
and that inroads upon both, as a result of exposure to conflicting interests
served within the relevant organization, are adequately avoided.
. . . .
The legal profession is a crucial and indispensable element in the
administration of justice and in the protection available to citizens
under the law. Safeguarding the efficacy and integrity of this factor
within a democratic society, is a matter of the highest concern and
priority. It is part of CCBE's mission to ensure, that both are given
CCBE consequently advises that there are overriding reasons for
not permitting forms of integrated co-operation between lawyers
and non-lawyers with relevantly different professional duties and
correspondingly different rules of conduct. In those countries where
such forms of co-operation are nevertheless permitted, lawyer
independence, client confidentiality and disciplinary supervision of
conflicts-of-interests rules must be safeguarded.
Commission members have stated that theirs is not to police or to supervise existing practices, a position with which no one disagrees. Some Commission members are affected by the fact that the Big Five already have thousands of lawyers as partners and employees, that they are probably violating the law and their lawyers are thumbing their noses at the applicable ethical standards, but that since nobody is policing, and the Commission is not a policeman, the only thing left to do is to legitimate what the Big Five have done by strong arm, through the dint of their power and wealth. I believe, however, that the states have heard the alarm. Some are already gearing up for enforcement, and they should be allowed to do their job, while the Commission does its work with regard to appropriate standards. Moreover, if the Big Five are in violation of law, as former ABA President Jerome Shestack said to the House of Delegates last August, it does not follow that we should be "complicit." 5
Mr. Chairman and members, I urge you to secure the facts and to retain an open mind as you do, without being wed to the views expressed in your June 8, 1999 Report. Go back to the House of Delegates with a recommendation for non-lawyer controlled MDPs only, as your mandate provides, when and if you are able to demonstrate that the public interest requires them and that the core values of the profession will not be sacrificed or compromised in the process.
It appears that if an MDP composed of practicing CPAs and lawyers were to be formed, at least 51% of the ownership of the MDP would have to be in the CPAs. I am advised that the Council of the AICPA (analogous to the ABA House of Delegates) has adopted a resolution that would mandate such ownership. Not yet an AICPA requirement, it will be a ballot item soon to be voted on by the AICPA members. The AICPA has also written a Model Accountancy Bill which it urges the states to enact and pursuant to which the 51% CPA ownership minimum would become law. I am given to understand that in about 20 states statutes have already been adopted which impose the 51% CPA ownership requirement. This state of affairs portends that all accountant-lawyer MDPs will be controlled by non-lawyers.
1. By way of identification only I note again that I am the Fessenden Professor of Law at Harvard Law School and that none of my comments or views should be attributed to Harvard Law School or to Harvard University which have no institutional position or views on the subject before us.
2. I also want to express my doubt that our 50 state Supreme Courts would be willing or able to police the non-lawyer controlled MDPs in regard to their day-to-day adherence to the professions core values, a duty the Report proposes that those courts should assume.
3. One can debate what proportion of a firm need be with the lawyers in order to assure their control. A figure of 75% strikes me as sufficient, but this requires further thought.
4. In my testimony last March I called attention to this report noted in The Economist of March 6, 1999. The survey itself appears online by link to the oral remarks I made during the course of my presentation to you on March 12, 1999, but unfortunately the Commissions home page does not take note of the survey or provide a direct link to it.
5. The Ohio State Bar Association has recently submitted a Report with a Recommendation to the ABA House of Delegates to call upon each jurisdiction to create and implement effective procedures for uncovering and investigating violations of its laws prohibiting unauthorized law practice and to pursue their active enforcement.