Thursday, March 26, 2015
Pennsylvania's New Pro Rep Rules Target Financial Accountability for Lawyers, Including Restrictions re Sales of "Investment Products"
New rules supplementing Pennsylvania's Rules for Professional Conduct, adopted by the Pennsylvania Supreme Court in late 2014, are intended to require greater accountability by lawyers for handling of client funds, including sums temporarily deposited in IOLTA accounts. The rules became effective on March 1, 2015. As we reported on this blog earlier, including here and here, the changes were an important response to disturbing instances of individual attorneys who stole client funds -- in the aggregate amounting to millions of dollars -- that they had purported to "invest" for the clients.
On March 25, I had the interesting task of serving as a moderator for a meeting hosted by the Elder Law Section of the Pennsylvania Bar Association to explore the implications of the new rules. Panelists included attorneys Stephen K. Todd and David Fitzsimons who have each served on the Pennsylvania Disciplinary Board. They were involved in either the drafting or implementation stages for the new rules. Also helping to set the stage were two additional panelists, practicing elder law and estate planning attorneys, Linda Anderson from the east side of Pennsylvania and John Payne from the west side of the state.
The audience included attorneys from a range of practice areas around the state, as well as Pennsylvania Supreme Court Justice Debra Todd. The dialogue following the panelists' opening remarks was robust, demonstrating support for the increased standards for record-keeping and safe-keeping of property, as well as enhanced powers for the Disciplinary Board to investigate suspected misconduct and demand accountability and disciplinary compliance.
Many of the comments and questions focused on a single new rule, reportedly the first in the nation, that addresses the role of lawyers with respect to "investment products," defined to include annuity contracts, life insurance contracts, commodities, investment funds, trust funds or securities.
The key provisions of new Rule 5.8 provide:
"(a) A lawyer shall not broker, offer to sell, sell, or place any investment product unless separately licensed to do so.
(b) A lawyer shall not recommend or offer an investment product to a client or any person with whom the lawyer has a fiduciary relationship, or invest funds belonging to such a person in an investment product, if the lawyer or a person related to the lawyer:
(1) has an interest in compensation paid or provided by a person other than the client or person with whom the lawyer has a fiduciary relationship; or
(2) has an ownership interest in the entity that sponsors, insures, underwrites, manages, or issues the investment product. . . ."
Some attorneys expressed concern that subsection (b) of the rule prohibited appropriate roles for ethical attorneys in assisting clients. Examples offered included the purchase of prepaid-burial plans or estate plan-related insurance or annuities, where the lawyer holds valid, dual licenses.
The comments to subsection (b) of Rule 5.8 stress that the purpose of this part of the rule is to "prohibit investment situations that are fraught with a potential for conflict of interest or that provide an opportunity for the lawyer to control or unduly influence the use or management of the funds...."
The Disciplinary Board representatives urged individuals who have specific concerns to raise them with the State Bar's "Ethics Hotline" or seek informal or formal advisories.
Along this line, David Fitzsimons described an informal advisory addressing Rule 5.8 that was issued in February, 2015 by the Philadelphia Bar Association's Professional Guidance Committee. Opinion 2015-2 responds to an inquiry about the ethical propriety of an attorney's "strategic partnership" with a financial services provider, where the attorney would be paid a portion of the financial advisor's investment or management fee. The inquirer stressed that she would "not be required to refer her clients to the financial services provider." Further, she would refer only clients who she "decides would benefit from such a relationship."
The Philadelphia Bar advisory opinion reviews interpretations of prior rules, as supplemented by the new rule, and concludes:
"It is clear that the new Rule, given both the prohibition in 5.8b1 and the definition of 'investment product' in 5.8c1, prohibits an attorney from recommending or offering an investment product under the circumstances described in this inquiry."
The healthy discussion about the new rules, and about the importance of effective self-regulation by attorneys, seems likely to continue. Additional sessions to explore the new rules are planned for the Pennsylvania Bar Associations' Elder Law Institute in July.