The amended rule forbids non-interest bearing pooled accounts, imposes new recordkeeping requirements, and obliges banks to report trust-account overdrafts.
On July 1, 2011, the Illinois Supreme Court amended Rule of Professional Conduct 1.15, tightening and clarifying provisions governing client trust accounts. The amendment is effective September 1, 2011.
Recordkeeping requirements spelled out
In its 1987 version of the rule, the court for the first time required lawyers to deposit nominal or short-term client funds into IOLTA (Interest On Lawyers Trust Accounts) accounts. Now, as amended, the rule clarifies and specifies that there are only two types of permissible accounts: an IOLTA account as defined in RPC 1.15(i)(2), which must be established with an eligible financial institution and must have the Lawyers Trust Fund of Illinois designated as income beneficiary, or a separate, interest-bearing, non-IOLTA client trust account that is established to hold the funds of a distinct client or third person, as provided in RPC 1.15(f). The latter type of account must be used for funds that are neither nominal in amount nor expected to be held for a short period, and the client or other third person must be the designated income beneficiary of the latter type of account.
Lawyers Trust Fund general counsel David Holtermann explained, "We came to be aware that some lawyers interpreted the former rule as permitting the use of a non-interest bearing pooled trust account for the deposit of client funds. We've never viewed the rule as supporting the use of that type of account, but in consultation with the ARDC we determined that it would be helpful to clarify that that type of account is not permissible. To the extent that there was ambiguity, it was only fair to remove it."
The court also amended the rule's recordkeeping requirements for lawyers. Subsection (a) of the amended rule spells out in detail what records lawyers must keep. Lawyers must prepare and maintain receipt and disbursement journals that record all deposits and withdrawals from client trust accounts with the date, source, and description of each deposit and date, payee, and purpose of each disbursement.
Additionally, lawyers must prepare and maintain contemporaneous ledger records for all client trust accounts showing, for each separate trust client or beneficiary, the source of all funds deposited, the date of each deposit, the names of all persons for whom the funds are held, the amount of the funds, the dates, descriptions, and amounts of charges or withdrawals, and the names of all persons to whom funds were disbursed.
Lawyers must also reconcile ledger balances with client trust accounts and prepare and maintain reconciliation reports of all client trust accounts on at least a quarterly basis. For a period of seven years, lawyers must maintain all checkbook registers, stubs, checks, deposit records, bank statements, and the like as well as copies of retainer agreements with clients and accountings to clients or anyone else, along with copies of all portions of client files that are reasonably necessary for a complete understanding of the financial transactions.
Overdraft notification: and "early warning" for ARDC
The amended rule also requires that to qualify as eligible financial institutions, banks must agree to notify the Attorney Registration and Disciplinary Commission of any client trust account overdrafts. Like the amended recordkeeping provisions, that change, said ARDC Administrator Jerome Larkin and Chief Counsel James Grogan, was initiated by ARDC.
"This amendment is intended to clarify existing requirements and to help lawyers comply with their trust account duties. The recordkeeping provision just gives lawyers more specific guidance on what they need to do to keep the complete records that the rule has always required," Larkin said. "The overdraft notification rule will give us early warning if a lawyer has an overdraft in his or her trust account."
"Most lawyers want to do the right thing," Larkin said. "The vast majority of what we expect to get through overdraft notification is opportunities for education of lawyers. Lawyers who are actually facing charges for misappropriation of client monies often explain that it arose from sloppy recordkeeping. It's our hope that education will avoid the problem."
Problems nipped in the bud, he and Grogan said, has been the experience of the 42 other jurisdictions that have adopted a similar version of the rule. And, indeed, Illinois has already seen positive results from more education.
"Our ethics inquiry call hotline has increased 40 percent since 2006. At the same time, our grievance volume has decreased. That's a [welcome] phenomenon lawyer disciplinary agencies are seeing around the country," Larkin said.
Larkin noted that in addition to links to the text of the rule as amended, press releases from the agency and from the supreme court, a FAQ, and the newly revised ARDC Client Trust Account Handbook, ARDC has posted a list of all banks that qualify as repositories for lawyer trust accounts on its website at https://www.iardc.org/NewRule%201.15.html.
The trust account overdraft notification agreement is also available at that link. ARDC, an accredited CLE provider, offers several free CLE webinars, including a new one-hour seminar, The Ethical Requirements of Handling Trust Funds Under Rule 1.15 and IOLTA Basics. View and download the list of ARDC CLE seminars available by visiting LTF, too, has posted information about the new rule at http://www.ltf.org/attorneys/attorneys_ruleamendmentinfo.html.