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Osborne Clarke is to shut down its investment management division over fears of a possible conflict of interest.
The firm feared its connection with a large number of corporate clients, whose shares are traded on the stock market, could lead to a conflict.
The move will set alarm bells ringing in other corporate law firms engaged in financial services work, raising the question of whether it is feasible to operate an investment funds management service and a corporate law practice.
Osborne Clarke's decision to pull the plug follows on from the resignation of investment head Alan Harris who has been poached by East Sussex firm Adams & Remers and will not be replaced.
Harris said: "Osborne Clarke had a large potential conflict of interest because it has a large corporate block and I therefore have colleagues who are privy to secrets in quoted companies. Meanwhile here I am buying and selling shares for clients."
Head of tax and trusts at the firm Sandra Brown confirmed: "We had this looming problem, because our company/commercial department worked with listed companies."
But she added: "In making the decision we also took into account the difficulty of finding a suitable replacement for Alan and the fact that we anticipated difficulties on the horizon with Crest share dealing."
Harris said he believed the problem was particularly acute at Osborne Clarke owing to the firm's "rather unusual appearance". He said: "It's the only Asim [Association of Solicitor Investment Managers] firm with a large corporate book and they decided the only sensible course was to pack it in. In my experience solicitors are never that comfortable with Chinese walls-type ideas."
David Lough, investment department head at Asim member firm Cripps Harries Hall, said conflict of interest was an issue all firms involved in investment services had to consider. "We've thought about it. On the other hand, Osborne Clarke does have its own particular business profile and is active in the commercial field."
Osborne Clarke is still managing funds worth about £20 million. Brown said the firm's first duty now was to its existing investment clients.
"We have a couple of months before Alan leaves, which will enable us to assist them to make other arrangements," she said.
Of Osborne Clarke's decision to move out of financial services work, Asim vice-chair Nick Grazebrook, of Shakespeares, said: "I think it's tragic, a great shame that Osbornes is doing this. Conflict of interest is something that Asim has examined but I'm quite relaxed about it."
He said there were a couple of court actions on the subject but added the courts seemed to be taking a practical view.