August 2001

New York Courts First in Nation to Directly Address MDP Regulation for Lawyers and Law Firms
Decision Has Major Consequences for Accounting Profession

NEW YORK—On July 24, the four Appellate Divisions of New York’s Supreme Court jointly adopted new rules that will allow, yet regulate, contractual relationships between lawyers and nonlegal professionals for the purpose of offering to the public, on a systematic and continuing basis, legal services by the lawyer or law firm and nonlegal professional services by the nonlegal professional or nonlegal professional services firm.

By adopting the rules, which take effect on Nov. 1, 2001, New York becomes the first state in the nation to directly address regulation of multidisciplinary practices (MDPs) by lawyers and law firms.

The new rules, first proposed by the New York State Bar Association to govern ancillary services and strategic alliances with nonlegal professional service providers, will have profound effects on the CPA profession, according to New York State Society of CPAs Executive Director Louis Grumet. These effects will be evident in terms of a formal alliance being formed between law firms and CPA firms, as well as increased competition from law firms, which opt to hire CPAs to provide nonlegal services (excluding audit and other services) in the law firm or established affiliated entities.

While these regulations represent a significant step by the New York state bar and court system to address MDPs by lawyers, Grumet said they actually set up a hybrid-MDP in which there are separate side-by-side professional service entities, which contractually maintain a cooperation business relationship to separately provide legal and nonlegal professional services through contract-based arrangements for reciprocal referrals.

The Appellate Divisions have not yet designated the nonlegal professions which lawyers and law firms may contract with to establish cooperative business arrangements; however, Grumet maintains that the CPA profession meets the prerequisites to be determined by the appellate divisions in establishing the list of eligible professions. “I hope the CPA profession will be included in the MDP list approved by the appellate divisions,” Grumet said.

The new rules on the contractual MDP relationship between lawyers or law firms and nonlegal professionals or nonlegal professional services firms prohibit the nonlegal professional or firm from having, directly or indirectly, any ownership, investment, managerial or supervisory right, power or position in connection with the practice of law by the lawyer or law firm. (See adjoining MDP rules.) A lawyer may not receive or give any monetary or other tangible benefit from giving or receiving a referral. Additionally, the lawyers or law firms and nonlegal professionals or firms in the contractual referral arrangement may not share legal fees. However, the rules permit the allocation of costs and expenses between the law firm and nonlegal professional service firm pursuant to the contractual relationship “…provided that the allocation reasonably reflects only the costs and expenses incurred or expected to be incurred by each.” Grumet noted that the CPA’s Code of Professional Conduct may need updating to address the impact of these contractual relationships with lawyers and law firms.

The rule also requires disclosing to the client that the contractual referral relationship exists “before the client is referred to the nonlegal professional service firms,” and the client of the nonlegal professional firm must be informed of such contractual relationship “before that client receives legal services from the lawyer or law firm.” In addition, the client must be provided with a copy of the new Statement of Clients Rights in Cooperative Business Arrangements, which includes a client consent form to be executed by signature.

Another significant change will allow law firms to advertise the nonlegal services they provide directly or through an entity owned or controlled by the law firm as well as the “nature and extent of services” available through the contractual relationships between the law firm and a nonlegal professional or nonlegal professional services firm.

The new regulations set forth by the courts are based on the April 2000 report, “Preserving the Core Values of the Legal Profession,” also known as the “MacCrate Report.” The report states that: “Common among law firms are affiliations with providers of nonlegal services that could be considered ancillary to the practice of law. The closest of these affiliations occur in the context of law firms that actually employ other professionals to assist in providing certain services to firm clients…In addition to instances in which non-lawyer professionals are employed by law firms (or in which individual lawyers are dual professionals) there are those instances in which lawyers have created separately wholly owned entities in which to conduct ancillary business.”

A list of such ancillary services by the nation’s 250 largest firms, identified by the National Law Journal in 1992, includes a number of consulting services also provided by CPA firms, such as management consulting, financial institution consulting, management information services, international trade consulting, employee benefits consulting, human resources consulting, and general business consulting. “These types of ancillary nonlegal services by law firms are now officially recognized by the New York bar’s new MDP rules and I expect law firms will see business and financial consulting services as a high-growth area and may hire CPAs to provide these services in law firms or their affiliated entities,” Grumet said.

“When these new rules are coupled with a rule change in 1999, which allows law firms to share (without limit) their net profits with non-lawyers for both salary and bonuses, the prospects of law firms hiring more CPAs to provide nonlegal services and compete with CPA firms could increase dramatically after Nov. 1, 2001,” Grumet said. In contrast, he pointed out that CPA firms can only share up to 35 percent of their net profits with non-CPAs under rules of the Board of Regents.

Lawyers who are employed by CPA firms and dually licensed CPA/lawyers should be interested in a provision of the new rule that presumes that the person receiving the nonlegal services from the lawyer, distinct from legal services being provided, believes the nonlegal services to be the subject of an attorney-client relationship; unless the lawyer has advised the person receiving the services in writing that the services are not legal services and that the protection of an attorney-client relationship does not exist with respect to the nonlegal services.