Introduction

KPMG is set to become the first Big Four accounting, tax, and consulting firm to offer legal services in the United States after being approved for a license to operate as an “alternative business structure” (ABS) by the Arizona Supreme Court on February 27, 2025.[1] The Arizona ABS program is unique in that it allows entities to offer legal services, even if some of its ownership or decision making is controlled by non-lawyers.[2] After KPMG filed an application in January of this year, the Arizona Committee on Alternative Business Structures recommended to the state’s top court that KPMG’s legal subsidiary, KPMG Law US, be approved for a license to operate as an ABS.[3]

Arizona is one of a handful of states, such as Utah and Washington,[4] that allow non-lawyers to provide legal services or otherwise own entities that provide legal services in some capacity.[5] KPMG already offers legal services in many other countries globally, and the United Kingdom and Australia have enacted regulations that allow non-lawyer ownership of legal service providers similar to the ABS program in Arizona.[6] Setting up a U.S. law firm could change the landscape of how legal services are provided, and some have called the future relationship to be developed between the Big Four and Big Law as one characterized by “coopetition.”[7]

Although the ABS program was started as a way to provide greater access to legal services and promote the public good,[8] there are ethical justifications behind prohibiting non-lawyers from owning an interest in entities that provide legal services.[9] KPMG—and entities operating as an ABS generally—will need to navigate these ethical concerns as they pave the way for the Big Four to offer legal services in the U.S.

Arizona’s Alternative Business Structure Program

In 2020, the Arizona Supreme Court voted unanimously to approve the elimination of Rule 5.4 from the Arizona Rules of Professional Conduct, which would have prohibited an ABS from providing legal services.[10]Arizona Code of Judicial Administration (ACJA) § 7-209 was subsequently enacted to establish the regulatory framework of the ABS program, taking effect January 1, 2021.[11] The Arizona Supreme Court website points to numerous advantages supporting its decision to establish the ABS program, particularly that:

• It will allow for greater technological innovations in the delivery of legal services to the public.
• It will provide additional capital to be infused in legal firms.
• It will allow firms to attract the best and brightest non-lawyer partners (as they desire equity in a firm just as lawyers want to be firm partners).
• It will allow for “one-stop shops” to be able to provide legal and non-legal services to a client.[12]

Model Rule 5.4

Like Rule 5.4 of the Model Rules of Professional Conduct, Rule 5.4 of the Arizona Rules of Professional Conduct addressed fee sharing and ownership arrangements between lawyers and non-lawyers.[13] The language of Model Rule 5.4 provides that in general:

• A lawyer or law firm shall not share legal fees with a non-lawyer.
• A lawyer shall not form a partnership with a non-lawyer to provide legal services.
• A lawyer shall not permit a person who employs the lawyer to provide legal services for another to control the lawyer’s professional judgment.
• A lawyer shall not practice in the form of a for-profit corporation if a non-lawyer owns any interest, is a director or officer, or has the right to direct or control the lawyer’s professional judgment.[14]

The comments to Model Rule 5.4 make clear that these limitations are in place to protect the professional judgment and independence of lawyers.[15] Where a lawyer shares fees with a non-lawyer who pays the lawyer’s salary or otherwise directs the lawyer in their rendering of legal services, there exists a risk that the lawyer’s interests may be misaligned with their obligations to their client. For this reason, Model Rule 5.4 strictly prohibits any such arrangement between lawyer and non-lawyer, completely eliminating the possibility of any conflict of interest arising out of a fee-sharing or mixed ownership regime.

Proponents of Model Rule 5.4 offer consistent justifications for keeping the rule in place. In the absence of such a prohibition, the financial and professional incentives of a partnership with a non-lawyer would influence lawyers to put the partnership’s interest above their client’s.[16] Model Rule 5.4 protects the lawyer from the pressures of having to serve the interests of both their clients and the shareholders of the business, which at times may be adverse.[17] Additionally, Model Rule 5.4 allows for the smooth regulation of the professional conduct of lawyers by the courts.[18] Non-lawyers are not held to the ethical standards that lawyers are and similarly are not subject to the authority of the courts.[19] Because of this, the judicial administration of a state’s ethics rules would be difficult in scenarios where an entity is owned and controlled by parties held to different ethical standards.[20]

However, some argue that the burdens of Rule 5.4 no longer outweigh the benefits, suggesting it is time for a change. By restricting lawyers from practicing law in an organizational structure in which fees are shared with non-lawyers, Rule 5.4 impedes the growth of the legal industry and keeps costs for legal services high.[21] If lawyers and non-lawyers could share fees, they could benefit from the cost and revenue synergies generated by the combination of services provided, which would increase the competition among legal service providers and reduce the costs for legal services.[22] As a result, there would be greater access to legal services, as fees would no longer be cost-prohibitive and lawyers could begin to partner with low-cost legal service providers managed by non-lawyers.[23] Finally, law firms must be able to adapt to the ever-changing legal landscape if they wish to survive. As technological developments in software allow for greater access to affordable DIY legal services, Rule 5.4 forces law firms to compete in the legal landscape with their hands tied behind their backs, a fight they cannot sustain for long.[24]

These concerns are exactly what motivated Arizona’s adoption of the ABS program under ACJA § 7-209. The program aims to allow legal service providers to provide legal services and promote the public interest while still maintaining ethical standards regarding a lawyer’s independence of professional judgement.

Arizona Code of Judicial Administration § 7-209

ACJA § 7-209, alongside Arizona Supreme Court Rule 31.1, establishes the regulatory framework for the ABS program.[25] The regulation sets out the licensure process, the responsibilities of the required compliance lawyer, and the ethical provisions applicable to an ABS.

Licensure

Applications for licensure as an ABS are first considered by Arizona’s Committee on Alternative Business Structures.[26] The Committee then must consider Supreme Court Rule 33.1(b) in determining whether to recommend that the Arizona Supreme Court grant licensure.[27] Under Rule 33.1(b), the Committee must base their recommendation on (1) whether the grant of licensure would meet the regulatory objectives of the ABS program and (2) whether the applicant has demonstrated adequate governance practices.[28] The regulatory objectives of the ABS program according to Rule 33.1(b) include:

• Protecting and promoting the public interest
• Promoting access to legal services
• Advancing the administration of justice and the rule of law
• Encouraging an independent, strong, diverse, and effective legal profession
• Promoting and maintaining adherence to professional principles[29]

The Committee must also ensure that the applicant has adequate governance structures and policies in place such that:

• Lawyers act with independence when providing legal services, consistent with the lawyers’ professional responsibilities.
• The ABS maintains proper standards of work.
• The lawyer makes decisions in the best interests of clients.
• Confidentiality consistent with the Arizona Supreme Court’s Rules is maintained.
• The business policies and procedures of the applicant do not interfere with a lawyer’s responsibilities to clients.[30]

These considerations largely reflect the arguments on both sides of the debate surrounding Model Rule 5.4. Viewed in this light, the Committee’s decision effectively turns into a balancing test. The Committee must ask whether the benefits of allowing an exception to the general prohibition on fee sharing (the regulatory objectives of the ABS program) outweigh the burdens of complying with the rule. In other words, the committee must determine whether the applicant has demonstrated sufficient governance mechanisms such that there is a low risk of ethical violations from granting an applicant ABS licensure in light of the purported societal benefits. The Committee can also deny a license on the basis of character and fitness concerns related to any individuals affiliated with the applicant.[31] Approved applicants must also renew their license every two years after the Committee reassesses whether the regulatory objectives and governance concerns continue to justify licensure.[32]

Responsibilities of the ABS and the Compliance Lawyer

Although an ABS is not restricted from having non-lawyers as owners, once licensed it is required to fully disclose its relationship with all parent companies, subsidiaries, owners, officers, and directors.[33] Further, a licensed ABS must adhere to the Rules of the Arizona Supreme Court and the code of conduct established by the regulations.[34]

To ensure compliance with ethical standards, the ABS is required to designate a compliance lawyer licensed to practice law in Arizona.[35] The compliance lawyer is responsible for ensuring that all lawyers and authorized persons of the ABS comply with their ethical and professional responsibilities and the regulatory requirements of the ABS program.[36] Should any breach of the regulatory requirements or ethical obligations of lawyers occur, the compliance lawyer is required to notify the state bar of the matter so that an investigation can be conducted.[37]

Code of Conduct

ACJA § 7-209 also requires all entities licensed as an ABS to comply with a code of conduct reflecting the responsibilities of a lawyer licensed to practice in Arizona.[38] Beyond the requirements for ABS licensure, an ABS must also adhere to certain standards of conduct in its operations.[39] These standards largely apply the Arizona Rules of Professional Conduct to the ABS as a whole, with provisions concerning conflicts of interest with clients, the professional independence of its lawyers, diligent legal services, and other ethical responsibilities related to the practice of law.[40]

In an effort to ensure that ethical standards are being met by every licensed ABS, the Committee on Alternative Business Structures is tasked with issuing an annual report to the Supreme Court of Arizona on the ABS program.[41] The report includes information regarding the number of approved applications, the number of approved licenses, any complaints or charges brough against an ABS, disciplinary actions taken, and recommendations to improve the ABS program.[42] These reports demonstrate that the Arizona Supreme Court is maintaining a watchful eye on the ethical standards of the ABS program, particularly with respect to the elimination of a widely accepted ethical rule. In the first three years of the ABS program, the Arizona State Bar did not initiate any complaints nor was any disciplinary action taken against any licensed ABS.[43]

KMPG Law US

With its approval for ABS licensure from the Supreme Court of Arizona, KPMG seeks to demonstrate exactly how the regulatory objectives guiding the ABS program will play out. While KMPG Law US will necessarily compete with Big Law for some legal work, KMPG sees its role in the U.S. legal landscape as being very specialized. While Big Law firms are still likely the most capable of managing and closing large M&A transactions, KPMG believes that it is well-suited to provide high-volume post-merger legal services such as integrating legal contracts and tech systems, tasks that typically overburden corporate legal departments.[44]

Many of KPMG’s justifications for registering as an ABS align with the regulatory objectives underlying the program. While the legal services KPMG seeks to provide could typically be handled by Big Law for high fees, KPMG sees them as a natural extension of its current capabilities, allowing them to provide these services at a lower cost on top of its accounting, tax, and consulting services.[45] Additionally, KPMG is not restrained by the partnership model of large law firms. While law firms must spend massive amounts of capital on retaining their top attorneys, KPMG plans to reinvest its capital into technology, allowing it to enhance its capabilities across all of its services.[46]

KPMG Law US demonstrates the advantages of the ABS structure promoted by the Arizona Supreme Court. As an ABS, KPMG will become a one-stop shop for its clients and act as a leader in driving for the technological innovations of legal services.

Ethical Concerns

To combat potential conflicts of interest, the Arizona Supreme Court approved KPMG Law US as an ABS on certain conditions to maintain ethical standards. Most importantly, KPMG Law US cannot provide legal services for any client that receives auditing services from KPMG or any of its member firms, but may still provide legal work to clients who receive services other than auditing.[47] Additionally, the KPMG Law US compliance lawyer is required to conduct semi-annual internal audits to ensure compliance with the ABS requirements and prepare a report of these findings.[48]

Because Arizona is one of the few states that allow for fee-sharing arrangements, other ethical concerns exist regarding how the firm plans to provide services to clients in other jurisdictions without violating the ethical rules. For these clients, KPMG plans to use staffing agencies and co-counseling relationships with other law firms, ensuring that no Arizona lawyer holds themselves out as a lawyer in another jurisdiction.[49]

Conclusion

The ethical concerns underlying Rule 5.4’s prohibition on fee sharing should not be downplayed. However, Arizona’s ABS program demonstrates that by eliminating this rule, it is possible to promote public welfare by fostering innovation in the legal field while still maintaining the ethical standards that the rule was meant to protect. As demonstrated by KPMG, the ABS program has paved the way for greater access to legal services at a lower cost than law firms typically demand and technological developments that will increase the capabilities of lawyers worldwide. This case serves as a reminder to all lawyers that the ethics rules, while important, should be constantly tested to ensure that they maintain professional standards in ways that most effectively promote the well-being of the legal profession and the public at large.

 

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[1] Justin Henry & Roy Strom, KPMG Wins Approval to Launch First US Law Firm for Big Four, Bloomberg L. (Feb. 27, 2025), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/before-the-bar/BNA%2000000194-a8ad-d938-a1fe-a9ff6ea70001 [https://perma.cc/KQ59-H7ED].

[2] Roy Strom & Amanda Iacone, KPMG Seeks License to Operate US Law Firm Based in Arizona, Bloomberg L., (Jan. 6, 2025), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/BNA%2000000194-3cec-da15-ad94-7cfd70830001 [https://perma.cc/V9LW-36SN].

[3] Justin Henry, KPMG Passes Key Step in Forming Big Four’s First US Law Firm, Bloomberg L., (Jan. 14, 2025), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/before-the-bar/BNA%2000000194-6548-da99-abfc-e57833460001 [https://perma.cc/4QQ3-XLC6].

[4] Ben Trott, Look To The US: Washington To Be Third U.S. State To Allow Alternative Business Structures (ABS), Marketing Lawyers, (Aug. 19, 2024), https://marketinglawyers.co.uk/insights/look-to-the-u-s-washington-to-be-third-u-s-state-to-allow-alternative-business-structure-abs/ [https://perma.cc/U2PD-5XYQ].

[5] Strom & Iacone, supra note 2.

[6] Id.

[7] Justin Henry, KPMG Says Big Four US Moves Would Displace Some Law Firm Service, Bloomberg L., (Feb. 19, 2025), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/X95K7U2K000000#jcite [https://perma.cc/PK48-MCWQ].

[8] A.R.S. Sup. Ct. R. 33.1(b).

[9] Model Rules of Prof’l Conduct R. 5.4 cmt. 1, 2 (2018) [hereinafter Model Rules]

[10] Alternative Business Structures (ABS) Frequently Asked Questions, Ariz. Jud. Branch, https://www.azcourts.gov/accesstolegalservices/Questions-and-Answers/abs (last visited Mar. 1, 2025) [https://perma.cc/T3WJ-U27L].

[11] Ariz. Code of Jud. Admin. § 7-209 [hereinafter A.C.J.A.].

[12] Alternative Business Structures, supra note 10.

[13] Model Rules R. 5.4.

[14] Model Rules R. 5.4.

[15] Model Rules R. 5.4 cmt. 1, 2.

[16] Michael Abdan, Changing of the Tide: Law Firm-Fee Sharing and Ownership with Nonlawyers, LawSites, (Nov. 12, 2024), https://www.lawnext.com/2024/11/changing-of-the-tide-law-firm-fee-sharing-and-ownership-with-nonlawyers.html [https://perma.cc/N9U5-FQ43].

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Abdan, supra note 16.

[22] Id.

[23] Id.

[24] Id.

[25] A.C.J.A. § 7-209; A.R.S. Sup. Ct. R. 33.1(b).

[26] A.C.J.A. § 7-209(E).

[27] Id.; A.R.S. Sup. Ct. R. 33.1(b).

[28] A.R.S. Sup. Ct. R. 33.1(b).

[29] Id.

[30] Id.

[31] A.C.J.A. § 7-209(E)(2)(d).

[32] Id. § 7-209(F).

[33] Id. § 7-209(G).

[34] Id.

[35] Id.

[36] Id. § 7-209(G)(3)(b).

[37] Id.

[38] Id. § 7-209(K).

[39] Id.

[40] Id.

[41] Id. § 7-209(D)(5)(e).

[42] Id.

[43] Alternative Business Structures Resources, Ariz. Jud. Branch, https://www.azcourts.gov/cld/Alternative-Business-Structure/Resources (last visited Mar. 1, 2025) [https://perma.cc/4QZN-2SUP].

[44] Henry, supra note 3.

[45] Id.

[46] Henry, supra note 7.

[47] Justin Henry & Amanda Iacone, KPMG Must Pivot Around Audit Clients in Creating US Law Practice, Bloomberg L., (Feb. 28, 2025), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/BNA%2000000195-4902-d37d-a9fd-cf8281650001 [https://perma.cc/3FQS-Q674].

[48] Alternative Business Structure Application of KPMG Law US, LLC, Admin. Order No. 2025-43 (Ariz. Feb. 27, 2025).

[49] Henry, supra note 3.