As attorneys entrusted with client funds, there must always be strict attention paid to obligations such as compliance. While there are safeguards in place such as finding approved banking institutions, another thing attorneys should continuously bear in mind is the flexibility of said bank's stability. Smartbean® is here to remind you that while managing a client trust account is no simple feat it is doable with the correct resources. The State Bar of California also offers an Ethics Hotline, which gives information and offers assistance on professional responsibility inquiries. This article will explore the safeguards offered to attorneys to prevents the worries linked to bank institution instability.
As attorneys should be aware, all of the funds they are responsible for holding within the client trust accounts are their responsibility, regardless of firm size or others involved in a workload. It should also be commonly known that it is upon them to investigate specific measures to discern which account funds can and cannot go into as well as what could be deemed as the attorneys mishandling, were an audit to occur.
One of the basics attorneys must know is the Professional Conduct Rule 1.15. This states the “Safekeeping Funds and Property of Clients and Other Persons”, which was updated within the past year. The rule requires the client monies be placed in bank accounts that are properly labeled with the terms “trust account” with clear identification as to which clients the funds are for and there should be no commingling of funds belonging to the attorney or law firm. Additionally, the rule mandates that attorneys maintain sufficient record-keeping, timely disbursement of settlements and funds, and communicate with clients in an appropriate and timely manner.
Interest On Lawyers Trust Accounts (IOLTA) generate revenue from the money held in trust accounts. This money is given to the state bar and is used to cover the costs of legal services for those who are unable to afford it outright.
For funds to be IOLTA eligible, they must either be so nominal in nature that holding them in their own trust account would cost more than the interest earned on them, or be held for a time period that is too short to justify its own account.
For funds to go into an IOLTA account, the banking institution must also meet a form of eligibility according to the State Bar's set regulations. The State Bar does legislate the eligibility of the banking institutions. It does so based on factors such as volunteering to provide higher rates of interest and lower fees for IOLTA accounts and more. However, this cannot guarantee that a financial institution is stable and will not fold.
The State Bar does what it can to regulate certain factors, however it cannot guarantee anything outside of the parameters institutions must follow to be in compliance. For example, the Rule 1.15 and IOLTA guidelines can serve as the regulatory and disciplinary standards. While the failure of a bank would be categorized as a legal issue, it may be surprising to learn that it is actually outside of the State Bar’s typical functions to handle this issue. But there are ways for attorneys to protect themselves and thereby, their clients.
In order to have protection from the instability of banks there is another level of potential safety to consider--financial insurance. The FDIC is the Federal Deposit Insurance Corporation (FDIC) and works to protect the funds that investors put into that bank. This includes accounts including MMDAs, checking accounts, savings accounts and others. The FDIC will make sure that investors received their funds back within a set threshold amount. However, not all accounts are eligible. And not all banking institutions are eligible. It is important to understand if your banking institution is FDIC insured or not before opening any accounts, especially client trust accounts.
The attorney’s duty to hold client funds is a task that requires compliance, education, and focus. Let Smartbean® assist you in keeping the books so your practice can focus on your clients. We are an experienced team specializing in helping attorneys like you meet your trust account bookkeeping and reporting obligations. Call Smartbean® for a free consultation today!
