Y O U N G L A W Y E R S J O U R N A L

A GUIDE TO THE AMENDED RULE OF PROFESSIONAL CONDUCT 1.15

UnderstandingtheNewClientTrustAccountRequirementsByMaryAndreoniandDavidHoltermann

Lawyers licensed to practice in Illi-nois need to be familiar with the amendments to Rule of Professional

Conduct 1.15 that took effect September 1, 2011. These amendments, announced by the Illinois Supreme Court in July, make three key changes regarding how lawyers handle client funds and client trust accounts:• Changes to Rule 1.15 (a) and (f ) clarify

that there are only two options for the deposit of client funds–an IOLTA client trust account or a client trust account established to hold the funds of the client with the client receiving the interest. No client funds may be held in an account that does not earn interest.

• Additions to Rule 1.15(a) include new trust account recordkeeping require-ments for lawyers.

• Rule 1.15(h) creates a trust account over-draft notification system, under which banks that hold client trust accounts must agree to notify the ARDC in the event the account is overdrawn.

A quick look at the purpose of Rule 1.15–titled “Safekeeping of Property”–puts these amendments in context. The rule specifies the responsibilities and obligations of lawyers who hold the property of clients in trust. Underlying these is the general principle that a lawyer holding the funds or property of a client or third person has a fiduciary duty to safeguard them and to segregate them from the lawyer’s personal and business assets.  Based on this principle, Rule 1.15 and its predecessors long have required lawyers to hold client funds in trust accounts for safe-keeping. That principle continues through the recent amendments to the rule. The

key changes reinforce it by clarifying the two allowable types of client trust accounts lawyers may use for the deposit of client funds. The expanded recordkeeping require-ments provide an additional safeguard for client funds. As an “early warning” system for mismanagement of an account that could lead to a loss of funds, the overdraft notification requirement provides a further safeguard. The remainder of this article highlights these key changes and provides guidance about what they mean and what practitio-ners may need to do in response.

Key Change #1: Only Two Types of Client Trust AccountsThe amendments to paragraphs (a) and (f ) of Rule 1.15 clarify that there are only two options for depositing client funds: either an IOLTA account or a non-IOLTA client trust account. An IOLTA account is a pooled interest-bearing client trust account, held at an eligible financial institution, for the deposit of nominal or short-term funds of clients or third persons. Interest on IOLTA accounts is payable to the Lawyers Trust Fund of Illi-nois (LTF), which makes grants to support

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legal aid programs throughout Illinois. A non-IOLTA client trust account is a separate, interest-bearing account estab-lished for the benefit of a particular client or client matter where the net income earned on the funds is paid to the client. Client funds may not be held in an account that does not earn interest. Paragraph (g) lists the factors a lawyer should consider in determining whether client funds are nominal or short term. Generally speaking, nominal or short-term client funds are those that cannot generate net interest for the client (i.e., in excess of the costs of establishing, maintaining and administering a separate account for the benefit of the client) and should be depos-ited in an IOLTA account. Funds that are not nominal or short-term should be placed in a separate, interest bearing trust account with interest paid to the client. Under paragraph (g), lawyers are required to exercise reasonable judgment in making the determination about whether client funds are nominal or short term. That exercise of reasonable judgment–and the connected decision on whether to place

client funds into one of the two allowed types of accounts–may not be the basis of any disciplinary charge. Most lawyers who handle client funds already use a pooled IOLTA account and the amended rules require no additional action, unless the lawyer wants to verify that the trust account is properly set up and that interest is, in fact, remitted to LTF. (Bank errors in the coding of IOLTA accounts are not uncommon.) If a lawyer or firm needs to establish an IOLTA account, simple step-by-step instructions and forms are available from LTF on its web site at www.ltf.org. You can also contact LTF staff for more assistance.

Key Change #2: Recordkeeping Requirement The addition of subparagraphs (1) through (8) to Rule 1.15(a) provides lawyers with detailed guidelines for keeping records of client trust account funds and transac-tions. Before the amended rule, lawyers were required to keep “complete records” of trust accounts and to “promptly render a full accounting” of trust funds or property upon request. But the rule did not provide

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accounting systems. The amended rule fills this gap. It con-tinues to require lawyers to maintain records for seven years, but additionally spells out the elements of the records to be made, col-lected, and maintained by lawyers. The rule also requires account reconciliation at least once a quarter. These required procedures encourage careful accounting that helps safeguard client funds. In addition, they benefit lawyers by requiring records that can be used to refute concerns that funds were handled improperly. In response to these changes, lawyers should carefully read Rule 1.15(a)(1-8) and review their trust account recordkeep-ing and reconciliation procedures. The ARDC has several resources that illustrate the requirements. These include basic accounting journals and forms that can be used as guides, as well as a form recon-ciliation report. These are available on the ARDC web site at www.iardc.org. Most comprehensively, the ARDC’s Client Trust Account Handbook provides a detailed look at recordkeeping and reconciliation procedures in addition to a broad overview of the requirements of Rule 1.15. It is also available online at https://www.iardc.org/toc_mail.html.

Key Change # 3: Automatic Overdraft Notification The final key change is the addition of an automatic overdraft notification provision under Rule 1.15(h). Banks that wish to be “eligible financial institutions” to hold client trust funds must agree to report to the ARDC anytime a properly payable instrument is presented against a client trust account containing insufficient funds, whether or not the instrument is honored. The rule requires lawyers to maintain trust accounts only in banks that have agreed to make such reports to the ARDC. This overdraft notification provision, which is also the rule in 42 other jurisdic-tions, provides another safeguard for client funds. It will not lead to any ARDC inquiry unless the lawyer’s trust account has insuffi-cient funds to honor a check or other debit.

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THE RULE CHANGED? WHAT DO I NEED TO DO?• Read the amended Rule 1.15(available through www.iardc.org or www.ltf.org).

• Check the form of your client trust account.Is it an interest-bearing account? If it is a pooled client trust account, is it an IOLTA trust account with the Lawyers Trust Fund receiving the net interest?  If not, it will need to be changed to an interest-bearing IOLTA trust account. Does your bank know that this account is subject to the overdraft notification provisions?

• Review your client trust account recordkeeping procedures. Does your present system of tracking funds and maintaining trust accounts records comply with the new recordkeeping requirements? 

• Implement regular reconciliation of the client trust account. To minimize the risk of an NSF trust account check, the client trust account should be reconciled once a month, if monthly statements are issued, or at least on a quarterly basis, to spot any accounting or bank errors.

• make sure your bank is an eligible institution for the deposit of client funds. (Check the frequently updated list posted on www.iardc.org and www.ltf.org.)

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A bounced check on a client trust account is an early warning of lawyer conduct that could injure clients. Early notice can help contain problems before many clients are affected and losses incurred. Experience in other states shows that most regulatory action taken under overdraft notification rules involves educational intervention. Prosecutions are not routine. Because an agreement to provide over-draft notification to the ARDC is a pre-requisite for holding client funds (whether in an IOLTA or non-IOLTA client trust

Questions about the rule amendments can be directed to the ARDC or the LTF. Both organiza-tions have extensive information about the rule amendments online at www.iardc.org and www.ltf.org. Other resources on these sites include FAQs and a webcast eligible for one hour of MCLE credit.

You can reach both organizations by phone. The ARDC’s Chicago office is at 312/565-2600. Contact LTF at 312/938-2906.

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augural year will be chaired by Kyle Olson, Baker

& McKenzie; John Tufano Jr., attorney at law; and

Maya Ganguly, attorney at law. The committee

will meet regularly on the third Monday of the

month. To join, visit www.chicagobar.org (under

Committees) or call 312/554-2134

account), lawyers need to verify that their bank has submitted such an agreement. Both the ARDC and LTF maintain a list of banks that have submitted agreements and are therefore eligible for the deposit of client funds. The list is cross-posted at www.iardc.org and www.ltf.org. After verifying the eligibility of their bank, lawyers should make sure the bank is aware of any trust accounts subject to the overdraft notifica-tion provision.

ConclusionThere is no reason to be daunted by the amendments to Rule 1.15. After reviewing the amendments and consulting resources such as this article and the materials avail-able from the ARDC and LTF, complying with the new provisions should be neither complicated nor difficult.

Mary Andreoni is ethics education counsel at the Attorney Registration & Disciplinary Commission. David Holtermann is general counsel of the Lawyers Trust Fund.

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