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Keep an Eye Out for Changing Trust Accounting Requirements

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Over the last several years, the State Bar has made a concerted effort to step up enforcement concerning supervision of trust accounts, so it is a good idea to stay informed of changes to the trust accounting rules. The State Bar has recently proposed amendments to the trust accounting rules (Rule 1.15 and its sub-parts). You can view the complete proposed amendments in the Spring 2015 edition of the Journal and on the State Bar’s website.

The proposed amendments would primarily add requirements that facilitate the early detection of internal theft and errors. Although not a complete list of all the proposed changes, a summary of the more significant proposed amendments are below:

Rule 1.15-1

The proposed amendment to Rule 1.15-1 adds credit unions to the list of possible depositories for trust accounts in light of the extension of FDIC insurance coverage to individual client deposits in credit union accounts.

Rule 1.15-2

  • In Rule 1.15-2, the proposed amendments clarify that a lawyer must indicate on a trust account check made out to himself, the name of the client or other identifying information from whose balance the item is drawn.
  • The proposal also specifies that cash and bearer withdrawals from a trust account are not allowed by any means. Debit cards are specifically prohibited to withdraw funds from a general trust or fiduciary account.
  • Rule 1.15-2 also makes clear that no funds, other than those received by a lawyer in connection with professional legal services or professional fiduciary services may be placed in trust (if handling fiduciary funds for family on a pro bono basis, the funds should not be placed in your trust account).
  • In addition, the proposed amendments to the rules clarify the duty to report misappropriation and provide that a lawyer who discovers or reasonably believes that entrusted property has been misappropriated must immediately inform the trust account compliance counsel in the State Bar’s Office of Counsel.
  • Further, when an accounting or bank error results in an unintentional and inadvertent use of one client’s trust funds to pay the obligations of another client, the event must be reported unless the misapplication is discovered and rectified on or before the next quarterly reconciliation.  The proposal also requires disclosure of information otherwise protected by Rule 1.6, Confidentiality of Information, if necessary to report the misappropriation or misapplication.
  • The proposed amendment to Rule 1.15-2 does not affect the current standard that non-lawyers may be signatories on a lawyer’s trust account.  However it does limit signature authority on trust account checks to either: (a) lawyers who have taken an approved one-hour course on trust account management; or (b) supervised employees who are not lawyers and do not perform monthly or quarterly reconciliations, but who have taken the approved course.
  • Trust account checks may not be signed using signature stamps, preprinted signature lines on checks, or electronic signatures.

Rule 1.15-3

In Rule 1.15-3, the proposed amendments do the following: revise the quarterly reconciliation requirement to state exactly how a three-way reconciliation is done; add monthly and quarterly reviews by the lawyer to facilitate early detection and correction of errors and internal theft; and specify electronic storage and retention periods for certain trust account records.

Specifically, the proposed amendments provide the following related to reviews:

(1) Each month, for each general trust account, dedicated trust account, and fiduciary account, a lawyer must review the bank statement and cancelled checks for the month covered by the bank statement;

(2) Each quarter, for each general trust account, dedicated trust account, and fiduciary account, a lawyer must review the statement of costs and receipts, client ledger, and cancelled checks of a random sample (pick at least three) of representative transactions completed during the quarter to verify that the disbursements were properly made;

(3) The lawyer must investigate, identify, and resolve within ten days any discrepancies discovered during the monthly and quarterly reviews;

(4) A report of each monthly and quarterly review, including a description of the review, the transactions sampled, and any remedial action taken, must be prepared. The lawyer must sign, date, and retain a printed copy of the report and associated documentation for a period of six years.  Note however, the signed and dated printed copy may be saved in electronic format provided it is retained in a format that cannot be manipulated, such as a PDF.

Rule 1.15-4

Rule 1.15-4, Trust Account Management in Multiple-Lawyer Firm, is a proposed new subpart related to trust account management in multi-lawyer firms where a firm may, but is not required to, designate a firm principal to serve as the trust account oversight officer [“TAOO”] to oversee the administration of the firm’s general trust accounts.  If you are a managing partner or owner of a multi-lawyer law firm, you should review this proposed rule carefully to determine whether you should designate a TAOO in your office.

The State Bar’s Trust Account Handbook is available on its website for your reference. Our Firm also offers customized trust account procedural assessments for law firms and lawyers who need outside assistance.  We will be discussing some of the proposed changes to the Rules in more depth in future blogs, once they are adopted by the State Bar.