An opinion this week from the Southern District of New York, SEC v. Alderson[1] [click here], held that an RIA’s communications with lawyers associated with its third-party compliance consultant were not protected by the attorney-client privilege or the attorney work-product doctrine. As a result, the district court compelled disclosure of over 230 communications passing between the RIA’s in-house counsel and its third-party compliance firm (staffed with licensed attorneys) before and during the course of an examination of the RIA by the Securities and Exchange Commission (“SEC”).[2] This ruling raises important considerations for an RIA or broker-dealer when engaging outside compliance consultants and lawyers, especially if the firm intends for certain of or all of those communications to be cloaked with privilege.


In Alderson, the SEC accused two IARs of violating § 206 of the Investment Advisors Act by misrepresenting the tax consequences, failing to disclose a conflict of interest about compensation, and other acts or omissions, concerning the transfer of U.K. pension assets to overseas retirement plans that qualified under the U.K. tax authority’s regulations as a Qualified Recognized Overseas Pension Scheme (“QROPS”).[3] The two IARs had previously worked for the RIA and invested clients into the RIA’s QROPS program, but were no longer affiliated with RIA at the time of the lawsuit filing.

The Compliance Consultant Arrangement

MarketCounsel, LLC, a compliance consulting firm staffed with licensed attorneys, advised the RIA on compliance issues. MarketCounsel was the affiliate of a law firm and touted that its compliance consultants were “seasoned securities attorneys with years of experience as well as . . . skills garnered [from working] within the securities industry.” [4] These same licensed attorneys performed services for both MarketCounsel and its related law firm, although MarketCounsel offered “membership packages” for “compliance services” at a lower cost structure than representation by the law firm, which offered its engaged clients “legal services” under a traditional billable arrangement.[5] The RIA opted to retain MarketCounsel.[6]

The SEC Exam and Assertion of Privilege for Subpoenaed Communications

Upon receipt of an examination notice from the SEC, the RIA’s in-house counsel sought advice from its principal MarketCounsel consultant, an attorney, who advised the RIA throughout the exam, until receipt of a deficiency letter from the SEC.[7] Approximately five years after the exam, the SEC sued the two IARs for the alleged § 206 violations. The two IAR defendants answered that they intended to defend the Complaint though their asserted reliance on the RIA’s and its parent’s compliance and legal department.[8] The RIA was not made a party to the SEC’s lawsuit.[9] During that litigation, the SEC subpoenaed documents from MarketCounsel and the RIA. The RIA firm objected to the subpoenas, seeking to shield as attorney-client privileged over 230 communications passing between the RIA’s in-house counsel and the compliance consultant.[10] The RIA contended that because the MarketCounsel consultants were touted to be—and in fact were—experienced securities regulatory attorneys, an attorney-client relationship existed between the RIA and MarketCounsel, making the communications off limits.[11]

The Privilege Analysis Step 1:

Did the RIA have a Reasonable, Good Faith Belief it was Seeking Legal Advice?

To support its claim, the RIA asserted the recognized principle that a client and its attorney need not have an actual attorney-client relationship so long as the purported client had a “reasonable, good faith belief” it was seeking legal advice from an attorney acting in her capacity as an attorney.[12] The SEC disputed this contention, arguing (1) the RIA could have engaged MarketCounsel’s affiliated law firm at the higher fee structure, but opted not to do so; (2) the membership agreement between the RIA and MarketCounsel disclaimed, in writing, the existence of any attorney-client relationship between the RIA and the firm; and (3) the agreement further stated that any advice offered by the attorney-consultants — although informed by their legal training and experience — should not be relied upon as legal advice or viewed as part of an attorney-client relationship.[13] The court agreed with the SEC. In its view, the membership agreement disclaimers and the absence of an engagement agreement for legal services created a “strong presumption” the communications were not protected by the attorney-client privilege.[14]

The Privilege Analysis Step 2:

Did the MarketCounsel Arrangement Morph into an Attorney/Client Relationship?

The court further noted, however, that the RIA could rebut the presumption against existence of the privilege by showing its relationship with MarketCounsel underwent “material transformation” either by express agreement or if MarketCounsel’s scope of services “clearly exceeded” those contemplated by the membership agreement.[15] But after reviewing the communications, and even determining that MarketCounsel’s attorney-consultants provided “what might be reasonably considered legal services” during the course of the SEC exam, the court nonetheless concluded the series of confidential communications stayed within the bounds of the membership agreement, which as noted disclaimed providing any legal advice. Thus, the relationship never “evolved” to that of attorney-client.

No Privilege Existed; and the RIA was “Penny Wise but Pound Foolish”?

In short, the court held no privilege existed. It deemed the membership agreement disclaimers and the RIA’s decision to retain MarketCounsel rather than engage its related law firm represented “strong circumstantial evidence” that the IRA could not have reasonably in good faith expected its communications with the attorney-consultant to be protected from disclosure under the attorney-client privilege.[16] Adding insult to injury, the court speculated that the RIA’s decision to use the less expensive MarketCounsel arrangement “rather than the more expensive law firm engagement”—with services being provided by the same individuals in either case—appeared “to have been a penny wise but pound foolish decision.”[17]

The Alderson opinion is a timely cautionary tale. When engaging MarketCounsel, the RIA made what appeared to be a reasonable decision, including weighing of costs—despite the court’s rather unnecessary “bench slap.”   Plus, the engagement occurred at least two years before the SEC exam. Where the RIA missed an opportunity was perhaps in not contacting legal counsel about the exam, which could have cloaked with privilege the communications it sought to protect.


[1] SEC v. Alderson, 2019 U.S. Dist. LEXIS 97241, 18-CV-4930 (June 10, 2019).

[2] Id. at *2. The number of communications is referenced in the underlying briefing, not the court’s opinion.

[3] Id. at *2-3.

[4] Id. at *5-6. An attorney who ran his own law firm co-founded MarketCounsel. The same licensed attorneys staffed both the law firm and the compliance consultant affiliate, but they were separate legal entities. Id. at *4-5

[5] Id. at *5.

[6] The court would criticize this decision as being “penny wise and pound foolish.” See footnote 17, infra.

[7] The opinion does not address the contents of the deficiency letter. However, the membership agreement explicitly viewed a deficiency letter as the “bright line separating MarketCounsel’s compliance services from [the] law firm’s legal services.” Id. at * 16.

[8] Id. at *3.

[9] At or near the time the SEC filed its lawsuit, the RIA entered into a settlement with SEC [click here] where it agreed to pay a civil penalty of $8 million for failure to disclose to clients certain conflicts of interests arising from undisclosed compensation and other Advisors Act violations relating to the QROPS program. See Order Instituting Administrative Proceedings, Investment Advisers Act of 1940 Release No. 4993 (June 4, 2018),

[10] Alderson, 2019 U.S. Dist. LEXIS 97241 at *4.

[11] The communications in dispute consisted primarily of the RIA in-house counsel asking the MarketCounsel attorney-consultant for advice about the exam and exchanging draft responses to the SEC’s questions and information requests. The MarketCounsel staff attorney advised and supported the in-house counsel throughout the exam. Id. at *8.

[12] Id. at *12. It is a universal requirement that in order for the privilege to arise, the confidential communications between the client and lawyer must be made “for the purpose of” obtaining or providing legal services. United States v. United Shoe Machinery Corp., 89 F. Supp. 357, 358-59 (D. Mass. 1950); Tex. R. Evid. 503(b) (1) (emphasis added). The membership agreement’s disclaimer of this purpose in Alderson created an extra-high hurdle for the RIA.

[13] Alderson, 2019 U.S. Dist. LEXIS 97241 at *12-13.

[14] Id. at *13. Per the court, the disclaimers were specific and “repeated ad nauseum.” Id. at *14. Still, the court noted the disclaimers and membership agreement were not dispositive to the privilege analysis. Id. at *13.

[15] Id. at *14-15.

[16] Id. at *13.

[17] Id. at *6. (“In what appears to have been a penny wise but pound foolish decision, [the RIA] opted for membership with MarketCounsel, rather than the more expensive law firm engagement.”).