New York lawyers told they cannot run the Big Apple operation of an ABS with external investors


New York: reviewing opposition to non-lawyer ownership, but it stays for now

New York lawyers are banned from running the Big Apple office of a UK alternative business structure (ABS) with non-lawyer owners, the local state bar has ruled.

The New York State Bar’s committee on professional ethics announced yesterday that such an arrangement would fall foul of rule 5.4 of the New York Rules of Professional Conduct, which forbids a lawyer from sharing fees with a non-lawyer, and from “practising law for profit with an entity that includes a non-lawyer owner or member”.

The opinion said this would be the case even if the New York lawyer was dual qualified as an English solicitor. However, a separate opinion issued last year means that a New York lawyer could be a member of an ABS if working in England and Wales.

The decision will only increase the caution of the largest City law firms towards external investment. For several years Germany’s legal regulator has warned that ABSs will not be allowed to operate there.

The opinion also affect firms in Australia with non-lawyer investors, and the District of Columbia, where non-lawyer employees can have an equity interest in law firms and which was the subject of the earlier opinion.

The opinion was resolving the specific scenario of New York lawyers establishing a New York office of an ABS with non-lawyer owners, where they would represent New York clients. They would be employees of the UK entity and would hold stock options and, in some cases, vested shares in the UK entity. Lawyers in the New York office would adhere to confidentiality rules and would not share confidences with UK non-lawyer managers. The entity would adhere to UK rules as well.

New York and 49 other states prohibit non-lawyer ownership of law firms, although as we reported last December, the American Bar Association’s Commission on Ethics 20/20 is considering adopting a model similar to legal disciplinary practices, with up to 25% ownership by non-lawyer staff at the firm. But it has ruled out ABSs.

The New York State Bar – which has 77,000 members – has also a established a task force on non-lawyer ownership reviewing its historical opposition to outside ownership. However, for the time being it maintains its opposition.

Separately, New York firm Jacoby & Meyers is challenging the ban on external investment in the courts of New York, New Jersey and Connecticut. The New York challenge, based on rule 5.4, was recently rejected on the grounds that the firm lacked standing, in part because there are provisions other than rule 5.4 that prevent external investment. The New Jersey case, however, has been referred to the state’s supreme court.

 

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