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Accepting a Referral Fee from an Investment Advisor

Adopted: April 23, 1999

Opinion rules that a lawyer may not accept a referral fee or solicitor's fee for referring a client to an investment advisor.


An investment advisory firm (the "investment advisor"), registered under the Investment Advisor's Act of 1940 (the "Advisor's Act") and qualified to provide investment advisory services in North Carolina under the North Carolina Securities Act, is contemplating a program in which the investment advisor will pay a referral or solicitor's fee to attorneys in North Carolina for referring clients to the investment advisor. The fee paid will be a percentage of the fee paid by the client to the investment advisor for investment advisory services. The investment advisor contemplates that the attorney's involvement will be limited to (1) providing clients with material describing the investment program, (2) introducing the client to the investment advisor's registered personnel and attending meetings at which the investment advisor's personnel explain the investment program to the client and assist the client in choosing the investment advisory services that best fit the client's needs, and (3) receiving copies of the client's periodic investment advisory statements.

The Securities and Exchange Commission has taken the position that persons providing solicitation services for a fee will not be required to register as an investment advisor under the Advisor's Act if the investment advisor who provides the services is in compliance with Rule 206(4)-3 (the "rule") of the Advisor's Act. The rule provides that a cash payment may be paid by the registered investment advisor to a solicitor if (1) the solicitor is not subject to a "statutory disqualification" under the Advisor's Act and (2) the referral or solicitation fee is paid pursuant to a written agreement which describes the solicitor's activities and the compensation for those activities, contains a solicitor's understanding to perform those duties under the agreement consistent with the investment advisor's instructions and the Advisor's Act, and requires the solicitor, at the time of any solicitation, to provide the client with a copy of the investment advisor's brochure (a disclosure document containing background information about the investment advisor and the compensation to be paid) and a separate written disclosure document that sets out certain information about the investment advisor, the solicitor, and the arrangement. The investment advisor must receive from the client a signed and dated acknowledgment showing that the client received the separate written disclosure document and the investment advisor must make a bona fide effort to ascertain that the solicitor complied with the terms of the agreement between the parties.

The investment advisor and attorneys participating in the program will comply with the Advisor's Act and the North Carolina Securities Act. May a North Carolina attorney accept a referral fee or "solicitor's fee" from the investment advisor for referring clients to the investment advisor?


No. Although the law may permit such payments under certain circumstances, the Revised Rules of Professional Conduct impose a higher standard of conduct. A lawyer must exercise independent professional judgment on behalf of a client when referring a client to a third party for services related to the subject matter of the legal representation. See Rule 1.7(b). If a lawyer will receive a referral fee from the third party, the lawyer's professional judgment in making the referral is or may be impaired. Written disclosure to the client will not neutralize the potential for the lawyer's self-interest to impair his or her judgment. Other ethics opinions are consistent with this holding. CPR 241 rules that a lawyer who sells insurance should not sell insurance to clients for whom he has done estate planning. Similarly, RPC 238 permits a law firm to provide financial planning services provided no commission is earned by anyone affiliated with the firm.

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