Ethics Opinions
Iowa Supreme Court Board of Professional Ethics and Conduct
Date of Opinion:
12/09/1999
Opinion Number:
99-04
Title:
INVESTMENT AGENCY AFFILIATION
Opinion:
You have requested an opinion concerning the propriety of an Iowa lawyer acting as an investment adviser representative for RIA (RIA) which is a broker dealer and registered investment adviser authorized to do business in Iowa.
Briefly, the pertinent parts of the program are as follows:
“Company RIA (‘RIA’) is a broker-dealer and registered investment adviser, licensed under the securities laws of the United States and authorized to do and doing business in the State of Iowa. RIA is qualified to act as an investment adviser and broker-dealer on a nationwide basis through its network of associated investment adviser representatives (‘IAR’).
RIA seeks to offer its IARs a fee-based asset management program utilizing referrals from professionals, including attorneys licensed in the State of Iowa (the ‘Program’). Under the Program, a participating attorney will identify legal clients who need financial management assistance, and will refer those clients to an IAR who will manage the clients’ investment portfolios. The IAR has the exclusive responsibility for managing the advisory account. The attorney, in his or her role as the referring party, is not authorized to manage or assist the IAR in management of the client’s account. The attorney refers the client to the IAR, is paid an ongoing fee for referral if the account is opened and thereafter may monitor the client’s account as the client and attorney deem appropriate. The referral fee paid to the attorney is a split of the investment management fee paid by the client to the RIA in an amount agreed upon by the attorney and the IAR. Before any fee may be paid to a participating attorney, the attorney would have to satisfy the applicable IAR examination and licensing requirements of the Iowa Securities Division. Although RIA serves as a conduit for payment of the fee to attain maximum administrative efficiency, the attorney’s client pays the fee the attorney receives under the Program. The fee paid to the attorney is for a separate activity, the referral, and not a fee for legal services or representation.”
The fiduciary relationship between the lawyer and the client should be reason enough to refuse such third party payments.
The Board has ruled that referral fees such as herein contemplated paid out of the fees which the client has paid to the third party are not proper where no ongoing legal services are being provided by the lawyer. See Formal Opinions 66-15 (1966), 79-34 (1979), 81-16 (1981), 88-2 (1988) and 95-11 (1995). The Board also feels that the arrangement you describe creates an impermissible conflict of interest between the lawyer’s desire to collect the referral fee and his or her duty to the client to make an impartial judgment as to the best investment adviser available, which might or might not be RIA.
On the basis of the foregoing, it is the opinion of the Board that an Iowa lawyer cannot properly participate in the “RIA” program.
You further state:
“The State of Illinois has approved this hypothetical scenario. If the attorney is licensed in both Illinois and Iowa, may the attorney accept referral fees under the Program for Illinois clients even if the Program is not permissible in the State of Iowa?”
These are not permitted in Iowa. Thus, as an Iowa licensed lawyer, you are not permitted to participate therein. See DR 2-107(A)(1)(2) and (3) and pertinent ethical considerations. See also Formal Opinion of the Board 81-3 (1981).
CAVEAT
: Any opinions of the Board (formerly known as the Committee) which are inconsistent with this opinion hereby are amended to conform herewith.