CHICAGO, Sept. 8, 2021 — The American Bar Association Standing Committee on Ethics and Professional Responsibility released today a formal opinion that marks its first guidance for the legal profession on how existing ABA model rules might affect whether and how lawyers can invest in alternative business structures (ABS) when those lawyers practice in non-ABS jurisdictions.
Two states – Arizona and Utah – have recently modified their Rule 5.4 to permit business structures that either allow nonlawyer ownership of law firms or the sharing of legal-related fees with nonlawyers. Since 1991, the District of Columbia has allowed nonlawyers to be partners in law firms.
With other states considering changes in their regulatory structure, Formal Opinion 499 outlines how ABA Model Rules of Professional Conduct would affect a lawyer’s “passive investment” in an ABS enterprise; or, in the case of Utah, an entity approved under the state’s “sandbox” in which the Utah Supreme Court approves a project that includes nonlawyer equity in a business that provides legal services.
The ABA formal opinion specifically noted that these and future changes raise the question of whether a lawyer admitted to practice in a jurisdiction adhering to the model rule that strictly bars nonlawyer ownership of law firms should be permitted to make a “passive” investment in a legal entity in an ABS-approved jurisdiction.
“A lawyer admitted to practice law in a Model Rule jurisdiction may make a passive investment in a law firm that includes nonlawyer owners operating in a jurisdiction that permits such investments provided that the investing lawyer does not practice law through the ABS, is not held out as a lawyer associated with the ABS and has no access to information protected by” other model rules, the formal opinion said. “With these limitations, such ‘passive investment’ does not run afoul of Model Rule 5.4.”
At the same time, the opinion cited several conflict-of-interest model rules that could either force the investing lawyer to refrain from the investment or appropriately address the conflict.
The ABA Standing Committee on Ethics and Professional Responsibility periodically issues ethics opinions to guide lawyers, courts and the public in interpreting and applying ABA model ethics rules to specific issues of legal practice, client-lawyer relationships and judicial behavior. Recent ABA ethics opinions are available on the ABA Center for Professional Responsibility website.
The ABA is the largest voluntary association of lawyers in the world. As the national voice of the legal profession, the ABA works to improve the administration of justice, promotes programs that assist lawyers and judges in their work, accredits law schools, provides continuing legal education, and works to build public understanding around the world of the importance of the rule of law. View our privacy statement online. Follow the latest ABA news at www.americanbar.org/news and on Twitter @ABANews.