As the ABA Journal recently reported, the Pennsylvania Supreme Court recently promulgated new rules (effective March 1) that are aimed at lawyers’ provision of investment advice to clients. I’ve been concerned about lawyers’ conduct in this arena since my involvement, early in my ARDC career, in a case involving a lawyer selling unregistered securities to clients (and doing lots of other things too). There was some pretty extreme conduct in that case, and most lawyers never approach anything like it (or like the multimillion-dollar fraud/Ponzi schemes that provide some of the motivation for the new Pennsylvania rules). But it’s still important for lawyers to realize the risks of even discussing investment advice or business transactions with clients, and to realize the potential for liability and exposure in those discussions.
The new Pennsylvania rules require lawyers to be appropriately licensed (by a securities authority) to sell, offer, or offer to place an investment for a client. They also prohibit lawyers from offering an investment product to a client or former client (or other person as to whom the lawyer has served as a fiduciary) if the lawyer, or a person related to the lawyer, has an ownership interest in the entity that manages the investment product. The Disciplinary Board of the Supreme Court of Pennsylvania’s commentary on the upcoming new rules, as promulgated during the rulemaking process, can be found here.
In Illinois, our Rule 1.8 is often invoked when lawyers engage in business transactions with clients. That Rule – which, post-2010, now regulates not just business transactions with clients, but situations in which lawyers “knowingly acquire[ ] an ownership, possessory, security or other pecuniary interest adverse to a client” – particularly requires that lawyers ensure that:
- the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client
- the terms of the transaction are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
- the client is informed in writing that the client may seek the advice of independent legal counsel on the transaction, and is given a reasonable opportunity to do so
- the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.
Our Rules thus do not go so far as to require separate securities or brokerage licenses, or to bar any particular kind of transaction if the lawyer or a relative has an ownership interest in the investment vehicle. Nor does Rule 1.8, on its face, require the disclosures described within the rule in transactions involving non-clients, former clients, or others with whom the lawyer may have had a fiduciary relationship. Individualized professionalism advice may be appropriate to guide a lawyer in considering what disclosures, if any, are needed in those kinds of situations.
It is helpful to recall, though, a recent development: Illinois disciplinary law recognizes that lawyers sometimes engage in business transactions, or other conduct, with people with whom they do not stand in attorney-client relationships, and that those transactions and situations are treated differently in the disciplinary system than those that do involve attorneys and clients. The Illinois Supreme Court, in its 2013 decision in In re Karavidas, 2013 IL 115767, recognized that not everything lawyers do necessarily subjects them to disciplinary liability, holding that “discipline for conduct occurring outside the attorney-client relationship should be limited to situations where the attorney’s conduct violates the Rules by demonstrating ‘a lack of professional or personal honesty which render[s] him unworthy of public confidence.’” Karavidas, id. at 15-16.
In so holding, the Court was not suggesting that lawyers like the one in my early case should not have been disciplined. Nor is Illinois a more lenient an environment for deceptive investment-related misconduct than Pennsylvania, now that the latter has adopted its new rules. Far from it. The lawyer in my case, for example, was found to have engaged in misconduct in relation to a family member, a client, and several non-clients. Common to all counts were circumstances that showed dishonest intent and actions. Both pre- and post-Karavidas, that kind of conduct can and does subject lawyers to discipline (whether or not they are licensed to sell securities). But post-Karavidas, a lack of clear or convincing evidence of dishonesty can then raise the question of whether the lawyer should be disciplined for assertedly imprudent or improper business decisions involving non-clients.
Lawyers should continue to take care in their non-legal business dealings to minimize risks to themselves and any clients whose interests may be involved. But the Illinois Court, in Karavidas, clarified that not every business risk is a disciplinary risk.