The Risk Manager, Fall 2010
In August 2010 the ABA adopted the Model Rules for Client Trust Account Records, replacing the Model Rule on Financial Recordkeeping. This change is important for Kentucky lawyers because the Model Rule on Financial Recordkeeping is cited in the comments to Kentucky Rule of Professional Conduct 1.15, Safekeeping Property.
The primary reason for the new Model Rules for Client Trust Account Records was explained in the report to the House of Delegates as follows:
There have been many changes in banking laws and practices since the adoption of the Model Rule on Financial Recordkeeping. The Check Clearing for the 21st Century Act (“Check 21”), 12 U.S.C. §5001 et. seq., was adopted in 2003 and allows banks to use electronic images of checks as a substitute for canceled checks. In addition, many merchants now convert paper checks into electronic images and the original checks are often destroyed. Most jurisdictional rules, and the current ABA Model Rule on Financial Recordkeeping, require lawyers to maintain the original canceled checks. Accordingly, lawyers are inadvertently running afoul of their jurisdiction’s rules of professional conduct. This resolution eliminates this danger for lawyers by defining what records a lawyer must maintain to satisfy the “complete records” requirement of Rule 1.15 and how those records must be maintained.
Along with changes to banking practices through “Check 21,” methods of banking have changed for lawyers and their clients. Electronic banking, and specifically, wire transfers or electronic transfers of funds have become more prevalent. This form of banking presents a special set of problems for lawyers with trust accounts because there is often no discernable paper trail to the transaction. Records of these transactions can be found as part of the lawyer’s monthly statement or through the lawyer’s online banking system, but banks do not provide specific confirmation of electronic transactions as a matter of course. Lawyers must be proactive in securing the necessary records for these transactions.
Key changes in Rule 1 on required financial records are:
(g) the physical or electronic equivalents of all checkbook registers, bank statements, records of deposit, pre-numbered canceled checks, and substitute checks provided by a financial institution;
(h) records of all electronic transfers from client trust accounts, including the name of the person authorizing transfer, the date of transfer, the name of the recipient and confirmation from the financial institution of the trust account number from which money was withdrawn and the date and the time the transfer was completed;
The Rule comments concerning electronic records are especially helpful:
 Rule 1(g) requires that the physical or electronic equivalents of all checkbook registers, bank statements, records of deposit, pre-numbered canceled checks, and substitute checks be maintained for a period of five years after termination of each legal engagement or representation. The “Check Clearing for the 21st Century Act” or “Check 21 Act”, codified at 12 67 U.S.C.§5001 et. seq., recognizes “substitute checks” as the legal equivalent of an original check. A “substitute check” is defined at 12 U.S.C. §5002(16) as “paper reproduction of the original check that contains an image of the front and back of the original check; bears a magnetic ink character recognition (“MICR”) line containing all the information appearing on the MICR line of the original check; conforms with generally applicable industry standards for substitute checks; and is suitable for automated processing in the same manner as the original check. Banks, as defined in 12 U.S.C. §5002(2), are not required to return to customers the original canceled checks. Most banks now provide electronic images of checks to customers who have access to their accounts on internet-based websites. It is the lawyer’s responsibility to download electronic images. Electronic images shall be maintained for the requisite number of years and shall be readily available for printing upon request or shall be printed and maintained for the requisite number of years.
 The ACH (Automated Clearing House) Network is an electronic funds transfer or payment system that primarily provides for the inter-bank clearing of electronic payments between originating and receiving participating financial institutions. ACH transactions are payment instructions to either debit or credit a deposit account. ACH payments are used in a variety of payment environments including bill payments, business-to-business payments, and government payments (e.g. tax refunds.) In addition to the primary use of ACH transactions, retailers and third parties use the ACH system for other types of transactions including electronic check conversion (ECC). ECC is the process of transmitting MICR information from the bottom of a check, converting check payments to ACH transactions depending upon the authorization given by the account holder at the point-of-purchase. In this type of transaction, the lawyer should be careful to comply with the requirements of Rule 1(h).
The new Model Rules cover law firm dissolution, sale of a practice, and make it clear that electronic filing of required records is permissible in “electronic, photographic, or other media provided that they otherwise comply with these Rules and that printed
copies can be produced.”
It seems reasonable to conclude that the new ABA Model Rules for Client Trust Account Records by implication are incorporated into Kentucky’s Rule 1.15 Comments and are appropriate guidance for Kentucky lawyers. By any measure these Rules are a much-needed update for client trust account management and are to be commended for their thorough and helpful instruction on ethically maintaining client financial information. We urge you to go to http://www.abanet.org/cpr/clientpro/home.html and download the new Model Rules to use in your firm’s financial management. If in doubt about their application to your situation, call the KBA Ethics Hotline
Note: For a quick refresher on client trust account professional responsibility we suggest “Client Trust Account Principles & Management for Kentucky Lawyers, Second Edition, 2010.” This 48-page guidebook covers the fundamentals of client trust account management and includes the complete text of key KBA Ethics Committee Opinions on client trust accounts. It is yours for the asking by contacting Nancy Meyers at Lawyers Mutual (502-568-6100 or 800-800-6101). It is also available on our Website at lmick.com – click on Resources.