Attorneys Setting up shop as Stockbrokers

By Steve Seidenberg.
25 November 2002
The National Law Journal
Mass. investment house talking to 12 law firms.
special to the national law journal
During the past 10 years, more and more law firms around the country
have set up affiliated businesses in such areas as public relations,
government lobbying, private investigations, investment advice and
economic analysis of litigation damages.
Now a small investment firm from Westboro, Mass., wants to make it
easier than ever for a law firm to enter a new line of business.
Atlantic Financial Inc. aims to help law firms create and operate
securities trading companies.
Atlantic has recently helped the 70-attorney firm of Bowditch and
Dewey in Worcester, Mass., set up an affiliated investment research
and trading firm named B&D Advisors. And Atlantic is currently in
discussions with a dozen other firms around the country about
setting up similar affiliates.
"This was in some respects a response to what our clients were
looking for," said Robert Longden, managing partner of Bowditch and
Dewey. The firm has a substantial trust and estate department which
manages more than $250 million in trust assets, but clients
frequently asked the firm to manage more than just trusts, he said.
"Many times clients have asked us if we could deal with individual
accounts and retirement accounts, but we couldn't because we could
only manage the trust accounts as fiduciaries," said Longden. So the
firm worked with Atlantic to launch B&D Advisors.
B&D has a small staff: three partners from Bowditch along with
several of the law firm's support staff. All three partners and one
of the support staff have become licensed through the National
Association of Securities Dealers as Series 7, general securities
representatives, which allows them, in essence, to act as
stockbrokers. B&D is an investment advisor registered with the
commonwealth of Massachusetts, which allows the business to provide
investment advice.
B&D remains closely connected with Atlantic Financial. "It's an
ongoing partnership," said Bruce Fenton, Atlantic's president. "We
go in at least once a week. We actively support them with clients
and NASD compliance, and we provide lots of sales and marketing
support."
It is not, however, an equal partnership. "We're the home office for
them," said Fenton, who explained that his firm will receive 50% of
the clearing and transaction fees. "We're the office of supervisory
jurisdiction for them. We hold all their licenses."
Not 'revolutionary'
Not so long ago, many in the legal profession would have been
shocked by the idea of a law firm opening up an affiliated
investment business. But no longer. "This is not a revolutionary
concept," said George Kulman, the American Bar Association's ethics
counsel. "It has been a good 10-12 years since law firms have
decided they want to operate ancillary businesses."
"Firms are in all kinds of businesses now, so it isn't all that
shocking that one would set up a subsidiary to go into securities
trading," said Professor Thomas Morgan of George Washington
University Law School in Washington, D.C., who played a key role in
writing the ABA's rule on law firms and affiliated businesses. "Most
states say that you have to follow all the rules of professional
conduct if you want to do this, but the rules don't prohibit this."
Six states, including Massachusetts, have adopted Rule 5.7 of ABA
Model Rules of Professional Conduct, which imposes an additional
requirement on firms going into ancillary businesses: When a client
might not be clear that the services being provided are not legal
services, the lawyers involved have to deliver the non-legal
services with all the protections of the model rules (e.g., they
will have to protect all information as confidential). In order to
avoid this obligation, the lawyers would need to clearly inform the
client that the services being provided are not legal advice.
Running an investment business doesn't seem to pose any inherent
ethics problem, according to Morgan. But he said, "If the firm
starts steering clients to invest in other clients, or if the firm
takes an unusually high fee for this service, there are all kinds of
ways that this can be overreaching."
Atlantic, which has been in business since December 1994, became
interested in setting up law firm affiliates several years ago. It
took a long time to create B&D because the attorneys at Bowditch
wanted to make sure all the possible bugs were ironed out before
proceeding. But Atlantic expects things will move more swiftly in
the future.
Atlantic has spoken with about 20 law firms about setting up
securities trading affiliates, and is currently in discussions with
12 firms in Boston; Hartford, Conn.; New York; and Providence, R.I.
Within several years, Atlantic plans to expand its program to other
cities.
"Mid-to large-sized firms are the ones who would benefit from this
the most," said Fenton-particularly firms that do a significant
amount of work on estate planning or employment law. Such firms have
also expressed the greatest interest in this, Fenton said. But he
added that the program might also be appropriate for small firms
that have niche practices.
While a press release from Atlantic said B&D became the first law
firm affiliate licensed to sell securities, apparently that is not
the case. The two-person law firm of Cohen & Burnett in McLean, Va.,
has a four-year old affiliated business-Legacy Analytics-that
provides investment advice and has members who are licensed NASD
brokers. And the businesses' head partner, I. Mark Cohen, thinks
there are several other small law firms offering the same type of
affiliated service.
How it works
[edited due to outdated clearing and custody
information which was current at the time of the original article
publication in 2002]
Atlantic also provides the attorneys at B&D with a lot of help in
making investment decisions. Atlantic's Web site puts it this way:
"Registered attorneys are...encouraged to defer the actual
day-to-day investment decisions to qualified experts, such as the
many mutual fund companies and money management firms who work with
Atlantic Financial. This relieves the registered attorney from the
responsibility of actually picking individual investments and making
judgments about the economy and financial markets."
Even with Atlantic's assistance, however, the Bowditch attorneys who
work at B&D are finding it isn't easy to juggle two different
businesses. "It has cut into the time we have to practice law," said
Longden. "I wish there were more hours in the day."
For now, at least, B&D seems to be making some clients happy. The
business has gotten more than 50 clients since it opened its doors
in early September, according to Michael Brockelman, a Bowditch
partner who also works at B&D. "We've had a very, very enthusiastic
response from our [law firm] clients," said Longden. And he adds
that B&D has also attracted customers who were not previously
clients of the law firm.
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