Proposed Illinois Legislation Targets Law Firm MSOs and ABS Structures
Highlights
- Illinois legislators have introduced two bills in an effort to regulate private equity and hedge fund investments in alternative business structures (ABS) and management services organization (MSO) arrangements involving law firms.
- Attention to these bills is critical, as an attorney who runs afoul of their provisions may face disciplinary action, statutory damages of $10,000 or treble damages, as well as attorneys' fees and injunctive relief.
Illinois State Sen. Michael Hastings (D-19th District) and Rep. Jennifer Gong-Gershowitz (D-17th District) introduced Senate Bill (SB) 3812 and House Bill (HB) 5487, respectively, on February 6, 2026. The identical bills are aimed at regulating private equity and hedge fund investments in alternative business structures (ABS) and management services organization (MSO) arrangements involving law firms.
The bills reflect the first attempt by the Illinois General Assembly to address whether and how nonlawyer participation in the business operations of law firms may be permitted. Attention to these bills is critical because an attorney who runs afoul of its provisions may be subject to disciplinary action and statutory damages ($10,000) or treble damages, along with attorneys' fees and injunctive relief.
A Closer Look
As a preliminary matter, the bills govern only those MSO arrangements that are owned, operated or controlled by private equity groups or hedge funds. Attorneys forming MSO structures without private equity or hedge fund participation fall outside the reach of the current bills.
The bills themselves codify the Rule 5.4 prohibitions found in the Illinois Rules of Professional Conduct by expressly prohibiting the MSO from interfering with an attorney's professional judgment or from exercising control over core elements of law practice management. This means that the MSO may not own/control client records, make hiring/firing decisions or set competency requirements. The bills further prohibit an MSO's use of some restrictive covenants, including non-competition and non-disparagement prohibitions.
One provision – Section 13(b)(3) – invites some concern regarding the payment of MSO entities. This provision provides that an MSO owned or controlled by private equity or a hedge fund may not charge any fee that is "directly or indirectly based on the fees, revenues, or profits" of the law firm. The breadth of the term "indirectly" invites uncertainty because every law firm pays its vendors from its revenue.
Apart from this language, MSOs operating within the conventional vendor‑style framework – providing administrative services, charging flat or cost‑based fees supported by fair market value (FMV) analysis and maintaining strict boundaries around legal work – should be compliant with the bills as they are currently written.
On the ABS side, Section 13(d) bars an Illinois lawyer from sharing legal fees with an out‑of‑state ABS unless the Illinois lawyer is licensed in the home state of that ABS, the shared fees relate to legal services performed in that state, and the other state's law controls the representation under Rule 8.5.
Conclusion
These bills signal Illinois' attention to law practice ownership, private investment and evolving service delivery models. That said, the enactment of such a bill would undermine the separation of powers that has long been recognized in Illinois, which has historically allowed the Illinois Supreme Court exclusive authority to regulate lawyers and the legal profession in the state, a position that has long been supported by the local bar associations.
Holland & Knight's Legal Profession Team is monitoring these developments closely and will provide updates as the legislative process unfolds. If you have questions about MSO structures, ABS considerations or implications for your existing operations, please contact your Holland & Knight relationship attorney.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.