ARDC - Attorney Registration & Disciplinary Commission

Frequently Asked Questions (FAQs)
on Amended Rule 1.15
 

 

Overview of Amended Rule 1.15

What has changed in Rule 1.15?
When do these changes take effect?
What should I do before the effective date?
What is an “eligible financial institution”?
How do I find out which financial institutions are “eligible” to hold client trust accounts?
If I am licensed in Illinois but practice in another state that has different trust account rules, which rules control?
 

Types of Client Trust Accounts

What types of client trust accounts can I have?
IOLTA or Non-IOLTA?  How do I determine which type of client trust account is appropriate?
If I currently have a pooled, non-interest bearing client trust account, what should I do?

What should be the name on the trust account?

 

Recordkeeping Requirement

What trust account records are now required?
Can the trust account records be maintained in electronic format?
Does the ARDC have any forms for recordkeeping?

 

Overdraft Notification
What does the Overdraft Notification Rule mean?
What is the purpose of the rule?
What if an NSF occurs on the client trust account?
When my bank reports an NSF to the ARDC, what will the ARDC do?
What if I have overdraft protection from my bank, will the bank still report me?
What if I put a "cushion" of my own money in the account to avoid the possibility of writing an NSF trust check, is that okay?

 

Resources

If I need more information about opening and/or maintaining client trust accounts, where do I go for more information?
List of Financial Institutions eligible to hold IOLTA or Non-IOLTA Client Trust Accounts in Illinois

IOLTA Enrollment Forms & Instructions 

 

 

 

 

 

   

 

Overview of Amended Rule 1.15

 

What has changed in Rule 1.15?

 

There are three key changes and they are contained in paragraphs (a), (f) and (h) of Rule 1.15:

 

  1. Only Two Types of Client Trust Accounts – Paragraphs (a), (f) and (g) clarifies that there are only two options for depositing client funds and that all trust funds must be held:

 

Rule 1.15 expressly prohibits non-interest or non-dividend-bearing trust accounts.  See Rule 1.15(a) and (f).

 

  1. Recordkeeping Requirement – Subparagraphs (1) through (8) to Rule 1.15(a) adds specific recordkeeping requirements for records relating to client trust funds.

 

  1. Automatic Overdraft Notification – Paragraph (h) adds an automatic overdraft notification provision whereby eligible financial institutions have agreed to report to the ARDC anytime a properly payable instrument is presented against a client trust account containing insufficient funds, irrespective of whether or not the instrument is honored.

 

When do these changes take effect?  

 

September 1, 2011. 

 

What should I do before the effective date?

 

Read amended Rule 1.15 and determine what changes, if any, need to be made to their client trust account(s) and/or recordkeeping procedures

 

Check the Form of the Client Trust Account – is the client trust account an interest- or dividend-bearing account and 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- or dividend-bearing IOLTA trust account.  Step-by-step instructions to establishing an IOLTA client trust account are available on the LTF website at www.ltf.org.

 

Review Your Client Trust Account Recordkeeping Procedures – is the present system of tracking funds and maintaining trust accounts records sufficient to comply with the new recordkeeping requirements of Rule 1.15(a)(1)-(8)?  The ARDC has basic accounting journals and forms that can be used as a guide to the information that must be maintained under amended Rule 1.15. Click Here

 

Implement Regular Reconciliation of the Client Trust Account – is there a regular reconciliation of the accounting records with bank statements?  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.  The ARDC has prepared a form Reconciliation Report that can be used as a guide.  Click Here

 

What is an “eligible financial institution”? 

 

All IOLTA and non-IOLTA client trust accounts must be maintained only at an eligible financial institution (Rule 1.15(a)).  An “eligible financial institution” is defined in Rule 1.15(i)(3) as:

 

…a bank or a savings bank insured by the Federal Deposit Insurance Corporation or an open-end investment company registered with the Securities and Exchange Commission that agrees to provide dishonored instrument notification regarding any type of client trust account as provided in paragraph (h) of this Rule; and that with respect to IOLTA accounts, offers IOLTA accounts within the requirements of paragraph (f) of this Rule.

 

How do I find out which financial institutions are “eligible” to hold client trust accounts?

 

A list of financial institutions that have agreed to provide Overdraft Notification on Lawyer Trust Accounts, as required under Rule 1.15(h), is available on the ARDC website (www.iardc.org) - List of Financial Institutions that Have Agreed to Overdraft Notification

 

To confirm that your financial institution also offers IOLTA accounts within the requirements of Rule 1.15(f), please check the Lawyers Trust Fund of Illinois website (www.ltf.org) - List of Financial Institutions Eligible to Hold IOLTA Trust Accounts.

 

Both lists will be frequently updated.

 

If I am licensed in Illinois but practice in another state that has different trust account rules, which rules control?
 

Rule 1.15(a) states: “Funds [of clients or third persons] shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person.”  When a lawyer participates in an IOLTA program in another state where the law office is situated, the lawyer’s ethical obligation is satisfied by compliance with the IOLTA rule of the state in which the office is situated. See also ILRPC Rule 8.5(b) (Choice of Law).

 

Excerpt from the Lawyers Trust Fund of Illinois website, "Rule 1.15 Amendments Information for Lawyers page."

I am licensed in more than one state. Do I need to establish an Illinois IOLTA account?

The location of your IOLTA account is determined not by where you are licensed, but by the state where your office is situated, where you practice, and where your clients reside or do business, unless otherwise directed by your client.

For example, a Missouri lawyer whose sole office is in Missouri but who occasionally represents clients in Illinois need not establish an Illinois IOLTA account to handle client funds. However, the lawyer should handle client funds as required by the safekeeping of property rules in Missouri, including participation in that state’s IOLTA program as appropriate. In contrast, a lawyer or law firm with bona fide offices situated in both Florida and Illinois would require an IOLTA account in each state.

 

Types of Client Trust Accounts

 

What types of client trust accounts can I have?

 

There are only two types of client trust accounts under the requirements of paragraphs (a), (f) and (g).

 

IOLTA Client Trust Account – defined in Rule 1.15(i)(2) as “a pooled interest- or dividend-bearing client trust account, held at an eligible financial institution, with the Lawyers Trust Fund of Illinois designated as income beneficiary, for the deposit of nominal or short-term funds of clients or third persons as defined in paragraph (f) and from which funds may be withdrawn upon request as soon as permitted by law.”  The IOLTA trust account is comprised of client and third person funds that the lawyer has determined in the exercise of reasonable judgment cannot otherwise earn income for the client or third person in excess of the costs incurred to secure such income.  The interest income on these accounts is collected by the Lawyers Trust Fund of Illinois and distributed in the form of grants to provide legal services to the poor and other law-related services.  More information on the IOLTA program can be found the on Lawyers Trust Fund website at www.ltf.org.

 

Non-IOLTA Client Trust Account – a separate interest- or dividend-bearing client trust account which holds the funds of a particular client or third person, which are not nominal in amount or expected to be held for a short period of time, with the net interest from the account paid to the client or third person.  The use of non-IOLTA trust accounts is limited to situations where the lawyer or law firm has determined in the exercise of reasonable judgment that the funds of a particular client or third person that are neither nominal or short-term.  See Rule 1.15(g) (factors in determining the type of account).

 

Non-Interest or Non-Dividend Bearing Client Trust Accounts Are Prohibited – Rule 1.15(a) and (f) explicitly provides that all client trust accounts must be interest or dividend bearing.

 

 

IOLTA or Non-IOLTA?  How do I determine which type of client trust account is appropriate?

 

The answer to that question depends on your reasonable judgment that the funds to be held in trust are nominal in amount or are expected to be held for a short period of time.  All trust funds that are nominal in amount or are expected to be held for a short period of time, including advances for costs and expenses, and funds belonging in part to a client or third person and in part presently or potentially to the lawyer or law firm, must be deposited in an IOLTA trust account, as defined in Paragraph (i)(2).  See Rule 1.15(f). 

 

Trust funds that are neither nominal in amount or are expected to be held for a short period of time must be deposited into a separate interest- or dividend-bearing non-IOLTA trust account client trust account with the client designated as the  income beneficiary.

 

In determining whether funds are nominal in amount or are expected to be held for a short period of time, Rule 1.15(g) provides that a lawyer or law firm “should exercise reasonable judgment” taking into consideration such factors as:

(1) interest - the amount of interest which the funds would earn during the period they are expected to be held and the likelihood of delay in the relevant transaction or proceeding;

(2) costs - the cost of establishing and administering the account, including the cost of the lawyer’s services;

(3) capability - the capability of the financial institution, through subaccounting, to calculate and pay interest earned by each client’s funds, net of any transaction costs, to the individual client.

The lawyer or law firm's reasonable decision as to which of the two types of client trust account allowed under Rule 1.15 to open will not subject the lawyer or law firm to a charge of ethical impropriety under the Rules.   Rule 1.15(g) states:

“No charge of ethical impropriety or other breach of professional conduct shall attend to a lawyer’s or law firm’s exercise of reasonable judgment under this rule or decision to place client funds in an IOLTA account or a non-IOLTA client trust account on the basis of that determination.”

 

If I currently have a pooled, non-interest bearing client trust account, what should I do?

 

Talk to your financial institution about what you need to do to change the account from a non-interest bearing account to an IOLTA, interest-bearing client trust account.   Typically, changing the account to an interest-bearing one would not involve closing the account (unless the account is not a checking account or other account payable on demand which is necessary for an IOLTA trust account) or changing the account number.

 

The lawyer or law firm enrolls in the IOLTA program by completing a sign-up form ("Notice to Financial Institution to Establish IOLTA Account") and submitting the form to his/her bank. The enrollment form instructs the bank to establish an IOLTA account for the attorney. The IOLTA forms can be obtained from the Lawyers Trust Fund website at www.ltf.org under the “IOLTA Resources for Attorneys” section or call the Lawyers Trust Fund at 312.938.2906 or 800.624.8962 to request additional copies.

 

If you have any questions about IOLTA or the Lawyers Trust Fund, please call Terri L. Smith, Director of Banking/MIS at 800-624.8962 or 312-938.3001.

 

What should be the name on the trust account?

 

The client trust account must be named in such a way that it is clear that it is a client trust account.  Such terms as “Client Trust Account” or “Client Funds Account” may be used or similar words that would clearly indicate the fiduciary nature of the account.   See Comment [6] to Rule 1.15. 

                            

Avoid using ambiguous words such as “Special Account.”

 

Also, for IOLTA trust accounts, the IOLTA account and the checks printed for the account CANNOT identify the Lawyers Trust Fund of Illinois as designee, trustee or owner.

 

Recordkeeping Requirement

 

What records are now required?

 

For all client trust account funds and other property held in trust pursuant to Rule 1.15(a) complete records must be maintained by the lawyer for a period of seven years after termination of the representation.

 

For client trust accounts, paragraphs (a)(1) through (8) specifically requires the following “complete records” that must be prepared and maintained:

 

Maintenance of complete records of client trust accounts shall require that a lawyer:

            (1) prepare and maintain receipt and disbursement journals for all client trust accounts required by this Rule containing a record of deposits and withdrawals from client trust accounts specifically identifying the date, source, and description of each item deposited, and the date, payee and purpose of each disbursement;

 

            (2) 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 or were held, the amount of such funds, the dates, descriptions and amounts of charges or withdrawals, and the names of all persons to whom such funds were disbursed;

 

            (3) maintain copies of all accountings, to clients or third persons showing the disbursement of funds to them or on their behalf, along with copies of those portions of clients’ files that are reasonably necessary for a complete understanding of the financial transactions pertaining to them;

            (4) maintain all client trust account checkbook registers, check stubs, bank statements, records of deposit, and checks or other records of debits;

 

            (5) maintain copies of all retainer and compensation agreements with clients;

 

            (6) maintain copies of all bills rendered to clients for legal fees and expenses;

 

            (7) prepare and maintain reconciliation reports of all client trust accounts, on at least a quarterly basis, including reconciliations of ledger balances with client trust account balances. (8) make appropriate arrangements for the maintenance of the records in the event of the closing, sale, dissolution, or merger of a law practice.

 

(8) make appropriate arrangements for the maintenance of the records in the event of the closing, sale, dissolution, or merger of a law practice.

 

 

Can the recordkeeping be maintained in electronic format?

 

Yes, provided that printed copies can be made and the records are readily accessible to the lawyer.  See Rule 1.15(a).

 

Does the ARDC have any forms for recordkeeping?

 

The following forms, taken from the ARDC publication, The Client Trust Account Handbook, can be used as a guide to establishing the records required by Rule 1.15(a).  You may access the forms listed below:

 

Trust Account Receipts Journal
Trust Account Disbursements Journal
Trust Account Client Ledger Page
Trust Account Checkbook Register
Trust Account Monthly Reconciliation Report
Trust Account Record Retention Checklist

 

Overdraft Notification

 

What does the Overdraft Notification Rule Mean?

 

Under Rule 1.15(h), all client trust accounts, IOLTA and non-IOLTA, must be maintained at a financial institution that agrees to provide overdraft notification to the ARDC.  Upon presentation of a properly payable instrument against a client trust account containing insufficient funds (a/k/a non-sufficient funds or “NSF”), regardless of whether instrument is honored, the financial institution is to provide notice of the overdraft to the ARDC.

What is the purpose of the rule?

Rule 1.15(h) is based upon the ABA Model Rules for Trust Account Overdraft Notification and is also common nationally.1 At this time, 42 of 50 other jurisdictions (including the District of Columbia) have trust account overdraft notification rules.1  The preface to the ABA Model Rules observes that a bounced check drawn on a client trust account can be an early warning that a lawyer is engaging in conduct that could injure clients.  Experience in other states demonstrates that most regulatory action under an overdraft notification rule involves educational intervention, and that prosecutions are not routine. Such a rule can potentially reduce the level of lawyer defalcations because upon first notice of a bounced check a disciplinary agency can intervene before major losses occur and significant numbers of clients are harmed.  An effective overdraft notification program should conserve substantial resources for both clients and lawyers' funds for client protection.  The rule also helps identify those lawyers who simply need education on handling their trust accounts.

 

What if an NSF occurs in a client trust account?

 

If a properly payable instrument is presented against a client trust account containing insufficient funds, irrespective of whether or not the instrument is honored, the financial institution will send a report, in addition to the overdraft notice sent to you, to the ARDC within the time and format prescribed in Rule 1.15(h)(2).

 

When my bank reports an NSF to the ARDC, what will the ARDC do?

 

When the ARDC receives an overdraft notice, a letter will be sent to the lawyer asking the lawyer to provide a written explanation of the overdraft and to provide supporting documentation.  The ARDC anticipates that most overdraft matters will be resolved without pursuing formal disciplinary action against the lawyer. 

 

If it is discovered that the lawyer misappropriated client funds, engaged in other serious trust account violations, or there is an established pattern and practice of overdrafts, the ARDC will institute formal disciplinary proceedings against the lawyer.  This includes situations where the lawyer contends the lawyer was only “borrowing” client funds or where “technical” misappropriation occurred because of sloppy bookkeeping.

 

What if I have overdraft protection from my bank, will the bank still report me?

 

Yes.  Under Rule 1.15(h), the financial institution has agreed as a condition of it being a financial institution eligible to hold IOTLA and no-IOTLA trust accounts to report instances of instruments presented against insufficient funds regardless of whether the instrument is honored.

 

What if I put a "cushion" of my own money in the account to avoid the possibility of writing an NSF trust check; is that okay?

 

No.  This is commingling.  A lawyer cannot maintain the lawyer’s own funds in the client trust account to cover the lawyer’s writing trust checks on money not yet collected.  Under Rule 1.15(b) a lawyer can deposit his or her own money to cover necessary and reasonable bank charges such as returned-check fees and NSF charges (which are not fees covered by the Lawyers Trust Fund for IOLTA accounts).  If you deposit funds from a source and are not sure that it will ultimately be collected, wait and confirm with your bank before writing a trust check. 

 

Know your financial institution’s funds availability policy to ascertain when deposited funds become available for withdrawal and when they are expected to clear.  U.S. banking laws require that banks give customers access to their funds within one to five business days.  (The timing depends on whether the check-issuing bank is foreign or domestic, local or out-of-state.).  However, even though the check is available for withdrawal, the transaction can be reversed at a later date if the check was a forgery.  This may e several weeks after the check was available for withdrawal.  This is a special concern with cashier checks, as there are many scams involving fake cashier’s checks.   See E-Mail Scams and the Lawyer Trust Accounts on the ARDC website.

 

 

Resources

   

If I need more information about opening and/or maintaining client trust accounts, where do I go for more information? 

 

The ARDC publication, Client Trust Account Handbook provides information on the requirements of holding property in trust including how to open a trust account.  A hard copy may be obtained by calling the ARDC at 800-826-8625 or 800-252-8048).

 

The Lawyer Trust Fund of Illinois, which receives the interest income earned on pooled trust accounts, has information on how to open an IOLTA (Interest on Lawyer Trust Account) trust account, as well as where to find financial institutions eligible to hold IOLTA accounts.  The Lawyers Trust Fund website is www.ltf.org.

 

The Commission’s Ethics Inquiry Program is a telephone inquiry service that allows Illinois attorneys to call for help in resolving hypothetical ethical dilemmas.  To make an inquiry, please call the Commission offices in Chicago (312-565-2600) or Springfield (217-522-6838).  The Commission does not accept ethics inquiries by e-mail or facsimile.  

 

List of Financial Institutions Eligible to Hold IOLTA and Non-IOLTA Client Trust Accounts in Illinois

Lawyer Trust Fund of Illinois (www.ltf.org) - List of Financial Institutions Eligible to Hold IOLTA Trust Accounts

 

ARDC (www.iardc.org) - List of Financial Institutions that Have Agreed to Overdraft Notification

IOLTA Enrollment Forms & Instructions

 

        To download the IOLTA enrollment forms, click the form below. If you would prefer forms emailed or faxed to you, please contact the Lawyers Trust Fund, Terri Smith, Director of Banking at 312.938.3001 or 800.624.8962.

Notice to Financial Institution Forms & Instructions
         

        For further information: Lawyer Trust Fund of Illinois - www.ltf.org or call 800-624-8962 [Toll Free] or 312-938-906 [Main].

 

          


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