Pennsylvania is becoming the first state to restrict the ability of lawyers to give financial advice.

As of January 30, Keystone State lawyers who are state or federally licensed financial advisors or insurance agents will be barred from recommending or making an investments for clients if they or their family members have financial stakes in the transactions.

The key to the new rule implemented by the (Attorney) Disciplinary Board of the Pennsylvania Supreme Court is the prohibition. The Securities and Exchange Commission and state financial regulators generally permit such conflicts if they are disclosed.

“I've never seen a ban like this in the states,” said Cynthia Sharp, author of The Lawyer’s Guide to Financial Planning, published by The American Bar Association. Like the SEC and most states, the ABA’s Model Code of Professional Conduct allows attorneys to profit from financial advice if the conflict of interest is disclosed, she noted.

The new rule is the outgrowth of a long-standing state Supreme Court prohibition against lawyers accepting referral fees from non-lawyers, said Eric Strauss, chair of the Pennsylvania Bar Association’s Real Property Probate and Trust Law Section.

The existing guidelines were put in place to prevent questionable practices, such as a mortician getting a kickback from recommending an estate lawyer to a husband who just buried his wife or an auto insurance agent getting one from pointing a policyholder to a personal injury lawyer.

Strauss said he has long believed attorneys should not profit from giving financial advice to the people who trust them for their counsel on legal matters.

That’s why Strauss, based in Allentown, Pa., said he turned down a solicitation by a financial advisor to get a CFP license, join the firm and profit from the merger of the clients.
“I said no, how can I give independent objective advice if I stand to gain a sales commission?” said Strauss.

The bar on family members profiting from the advice by a lawyer with state or federal financial industry certification applies to a spouse, child, grandchild, parent or grandparent.

It could also prohibit an attorney from giving the advice if the state supreme court determined a live-in lover or live-in uncle was a close family tie.

Beyond the ban against profiting from a financial transaction, the board will prohibit lawyers from giving financial advice unless they have specific registrations with the state or the SEC.

The prohibition opens up Pennsylvania lawyers to potential sanctions from the board, ranging from a meeting with its chief counsel to disbarment.

Most states allow attorneys to give financial advice and make investments for their clients without being registered if these acts are ancillary to the other services they are providing and if they are not being paid extra, said Denny Crawford, a former president of the North American Securities Administrators Association.

Lawyers, like all financial advisors, justly expect to be paid by clients for their work, Crawford said, so many probably are billing clients for extra hours to do this due diligence.

This technically would be in violation of the rules, but the former Nasaa executive said state regulators focus their enforcement on complaints about fraud that are being aired the most voraciously.

And if clients of attorneys feel they are being illegally charged for financial advice, these squeaky wheels aren’t squeaking loudly, the former Texas Tech securities law professor said.