The State Bar of California’s Rules of Professional Conduct assigns attorneys with specific fiduciary responsibilities. Rule 1.15 serves as the primary mechanism through which the State Bar defines and enforces one of them: the safekeeping of client property.
The State Bar revised Rule 1.15 in late 2022, renewing its commitment to its profession’s clients and its trust in those practicing law throughout California. It emphasizes proactive accountability, fortifying attorneys’ ethical obligations, and California attorneys must understand their new responsibilities. Failure to do so may result in serious repercussions, up to and including enrollment as an inactive licensee, rendering one ineligible to practice law.
This article provides insight into California’s updated Rule 1.15 and suggests best practices to remain in compliance.
Attorneys throughout California collectively manage hundreds of millions of dollars on behalf of their clients. The State Bar retooled its Rule 1.15, ‘Safekeeping Funds and Property of Clients and Other Persons,’ to ensure its licensees conducted their client trust accounting duties ethically. And, after years of lax enforcement, its more rigorous requirements carry specific penalties to discourage further instances of fraud or mishandling.
The following bullet points summarize the obligations of Rule 1.15:
Recordkeeping is a fundamental obligation attorneys owe their clients, one stipulated by Rule 1.15. Specifically, Section (d)(3) requires two kinds of records be kept:
The required bank-created records consist of two documents: the bank account statements and the account’s canceled checks. To compile a more comprehensive audit trail, attorneys may also consider keeping account deposit slips and checkbook stubs.
For attorney-created records, the State Bar of California – unlike those in other states – doesn’t mandate explicit record-keeping requirements. It instead offers ‘minimum standards,’ which are currently established in Rule 1.15(d)(3):
Rule 1.15 does offer some specificity, though. Attorney-created records, for instance, can be digital or written, but if written, they must be kept in a bound accounting book in ink. Attorneys’ client ledgers must also clearly indicate each client for whom they hold funds. Section (d)(5) further requires attorneys to preserve all these records – for audit purposes – for five years after paying out clients’ funds.
Additionally, all receipts and records of client payments must be entered into both the client ledger and account journal within twenty-four (24) hours of any given transaction. Each entry should describe the client’s property, for whom it is held, when it was received, and when and to whom it was distributed. Section (d)(3) mandates that these transactions cannot be estimated and must be recorded to the cent.
Together, these guidelines demonstrate the State Bar’s determination to prevent further misappropriation of clients’ monies. Its Board of Trustees reserves its authority to adopt additional requirements, and its licensees are responsible for remaining current with these changes.
Rule 1.15 requires that attorneys keep clients’ assets separate from their own personal funds or their firm’s finances to safeguard client property further. This responsibility extends to monies in IOLTA accounts, where multiple clients' funds may be pooled together. In other words, attorneys must take care not to commingle money.
Commingling occurs whenever an attorney mixes their personal or business funds with those of their clients, usually in the same account. This activity directly violates Rule 1.15, which stipulates that attorneys must deposit and clearly label clients’ funds in a ‘client trust account.’ The account's name must be listed on its checks, documentation, and deposit slips. It’s even suggested that attorneys select a different check color for client trust accounts, a simple visual marker that adds a layer of protection.
Again, attorneys should refrain from mixing their own money with clients’ funds. Some exceptions exist, however. For instance, attorneys and/or their firms may make deposits to prevent bank charges from debiting against clients’ monies. These transactions must be appropriately recorded in the client trust account journal for the bank account, so attorneys may want to seek an experienced bookkeeper to ensure these charges don’t accrue against the trust account.
Some commingling may occur unexpectedly. A bank may offer instant credit, which credits the account for deposits while waiting for funds from another institution to clear. This transaction may serve as a loan to the attorney or law firm, and if it’s in the name of the attorney (or firm) and subsequently deposited into the client's trust account, those funds have been commingled. Similarly, when banking institutions offer automatic overdraft protection, commingling may result if the account on automatic withdrawal belongs to the attorney.
To avoid another common instance of commingling, attorneys should withdraw payment for their services immediately upon receipt of a settlement – or upon determination of the frequency of such payments – assuming an agreement exists regarding what percentage of it belongs to the firm. Otherwise, the attorney’s funds could be considered commingled with their client's.
SmartBean® – through our Trust Account Bookkeeping (TAB) service – helps attorneys navigate these new stringent requirements. We provide accurate and affordable reporting support, including daily transaction categorization and monthly account reconciliation. Our team, well-versed in the updated mandates of Rule 1.15, ensures our clients meet their fiduciary responsibilities to their clients as well as their ethical obligations to the State Bar of California.
So, schedule your free consultation with us today because, at SmartBean®, we’re not just bean counters; we’re the Beans you can count on!