This past year, the State Bar implemented significant changes to how attorneys maintain client funds. The update to Rule 1.15, “Safekeeping of Client Funds and Property of Clients and Other Persons,” and the creation of CTAPP under Rule 2.5 presented clear guidelines for how attorneys were to carry out these fiduciary duties.
Trust Account Regulations: Changes
With these changes, the State Bar of California suggested that there may be further upcoming updates to these changes. Law firms and attorneys alike are responsible for staying up to date on both the program and new regulations via the resources offered by the State Bar of California’s website and the Handbook on Client Trust Accounting.
Since attorneys must remain up to date on any regulation changes of trust accounting, this implication alone firmly implies that changes will undoubtedly come.
But what exactly will future trust account protocols look like? Will there be a repeat of the 2023 overhaul where regulations and expectations are completely reworked? The State Bar of California has given licensees little insight into the answers to these questions.
Going forward, the only concrete expansion plans from the State Bar refer to the Client Trust Account Protection Program or Rule 2.5. Per the State Bar’s website, potential future implementations include:
- “Expanded public outreach and education on the rights of clients and attorney responsibilities;
- Enhanced education for attorneys on best practices in client trust account management;
- Compliance reviews of selected lawyers by a certified public accountant to ensure adherence to client trust account management requirements.”
These updates can be expected to occur and should not come as a surprise to attorneys if these updates become part of Rule 2.5 compliance. No further implementations have since been named.
Trust Account Regulations Predictions for the Future
Perhaps the best way to garner upcoming regulations predictions is to look at the areas of trust accounting regulations most commonly presenting difficulty to attorneys and law firms.
Historically and recently, these points of contention are guaranteed to be the jumping-off point for new regulation if and when the State Bar begins to make legislative alterations.
Common licensee pain points/mistakes include:
- Incomplete record-keeping: Rule 2.5 presented new regulations surrounding attorneys' reporting and record-keeping habits. Under this rule, attorneys must keep a client journal, client ledger, and bank statements for all clients. Before the 2023 regulation, there were less strict rules on keeping records, leaving room for error amongst practicing attorneys.
- Excessive number of Client Trust Accounts: Since larger firms often have multiple attorneys requesting to open trust accounts at any given time, this can cause administrative chaos or a potential lack of knowledge of the status of each account.
- IOLTA account vs individualized Client Trust Account: there are stipulations regarding what kind of funds are eligible to go into an IOLTA account. Often, attorneys still need assistance deciding which type of account is right for safekeeping their client’s funds.
- Commingling: The new laws surrounding mixing client and attorney funds are thorough; thus, new regulations shouldn’t be necessary.
- Lack of duty separation: Fraud and error are most likely to occur when key responsibilities fall on one person.
- Liability in the event of Bank Failure: IOLTA and Rule 1.15 don’t regulate attorney liability regarding bank failure. This would pose a large issue for funds being held.
To combat the previously mentioned, the State Bar might move to rectify with the following regulations predictions:
- For incomplete recordkeeping: The creation of CTAPP presented solutions to record-keeping issues, and the reinforcement of compliance is done via the potential to fall into inactive status. If an attorney does not comply, a requirement for working with an experienced bookkeeper may be implemented for a specified time.
- For Excessive Number of Client Trust Accounts: Outlining and implementing a system for requesting new client trust accounts could guarantee firms know how many CTAs their attorneys have. They can ensure follow-up and all measures are taken to remain compliant.
- IOLTA account vs individualized Client Trust Account: A closer look into the classification of “nominal amount of time” and other subjective terms used to determine if funds should go into an IOLTA account may be presented if an overwhelming amount of attorneys need assistance with this decision.
- For Commingling: Per Rule 1.15, safe-keeping mandates are relatively airtight. Trust account future rules would likely update with a stricter timeline in which attorneys must move fees they have earned. Perhaps another 7-14 day rule would be implemented.
- For lack of duty separation: To reduce the risks presented here, the State Bar could mandate that certain critical functions be dispersed amongst a group of licensees at a firm. The tasks, for example, could be broken up by the following and rotated periodically: Custody of assets, reconciliation, and record-keeping.
- Liability in the event of Bank Failure: Technically speaking, this issue reaches beyond the State Bar’s risk management and regulatory functions. However, it remains within the realm of possibilities. Perhaps the State Bar can determine a barometer for what seems to be “foreseeable factors” that a financial institution will fold and regulate protocols around the matter.
Help Maintain Client Funds Using SmartBean®!
Should attorneys have questions on obligations about maintaining client funds, there are resources such as the aforementioned Handbook for Client Trust Accounting for California Attorneys.
The Ethics Hotline is also available at specified times. The above statements are merely trust account future regulations predictions. The above should not be taken as legal recommendations of any sort. Our official legal recommendations can be given when you give us a call at SmartBean®!
We’re the bean counters you can count on to ensure you remain in compliance with the present safekeeping laws and whatever the trust account future looks like! Call for a free consultation of our TAB services!
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