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Signage is seen outside of the American Bar Association (ABA) in Washington, D.C., U.S., May 10, 2021. REUTERS/Andrew Kelly
(Reuters) - As some U.S. states begin to experiment with loosening up rules governing law firm ownership, lawyers elsewhere can take a stake in such ventures without running afoul of certain ethics rules, the American Bar Association said Wednesday.
The new guidance comes as states push ahead with regulatory changes to shake up traditional law firm ownership and fee sharing rules. Utah and Arizona last year both took major steps to allow for innovation in new legal services business structures.
Businesses in Utah can apply to participate in the state's legal "regulatory sandbox" program. The state's high court approved the initiative in August 2020 for two years, and recently extended the sandbox program, which has approved nearly 30 entities, to seven years.
Arizona's top court the same month became the first state in the country to eliminate its version of ABA Model Rule 5.4 barring non-lawyer ownership of law firms. As of last month, the court has approved eight entities as alternative business structures (ABS). The District of Columbia modified its version of the rule in 1991, but does not allow passive investment in law firms, the opinion said.
Now, as other states weigh reforms, the ABA's ethics and professional responsibility committee has let lawyers know that they can "passively" invest in a firm in states like Utah and Arizona that have approved those law firm ownership structures, even if the lawyer practices in a state that doesn't allow for such businesses, according to the new opinion.
The guidance defined passive investment as when a lawyer "contributes money to an ABS with the goal of receiving a monetary return on that investment," excluding situations where a lawyer practices through the entity or gets involved in its day-to-day operations.
There are certain limits to avoid violating Rule 5.4, the rule that generally prevents fee-sharing and non-lawyer ownership of firms.
A lawyer making the investment should not practice law through, or represent that they are associated with, the alternative legal business, according to the opinion. The investing lawyer also can't have access to certain information about the a client representation except in certain situations, the committee said.
Lawyers that could have a conflict in the future between their practice and the work of the business "does not mean that the lawyer cannot make a passive investment in the ABS," the opinion said. If there is a conflict at the time of the investment, though, a lawyer either shouldn't invest or can "appropriately address the conflict."
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ABA blesses some lawyer investment in alternative legal biz structures - Reuters
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