by Carole J. Buckner
The California State Bar has published a wealth of materials over the past several years directed at educating California lawyers regarding compliance. The saga of attorney Tom Girardi’s conviction for stealing millions from his firm’s clients continues to serve as a backdrop for the State Bar’s ongoing efforts to regulate client trust accounting. The amendment of applicable client trust accounting rules, extensive educational efforts, and increased reporting and annual certification requirements, as well as the adoption of Rule 8.3, the so-called “snitch rule,” have moved the State Bar’s client protection mission forward. At the same time, recent discipline decisions continue to reflect substantial client trust accounting violations. Now the California State Bar is readying for the next phase of the Client Trust Accounting Protection Program (CTAPP) and has proposed changes to the CTAPP rules as well as new rules to facilitate audits of client trust accounts and more in-depth investigations. In view of this, now is the time for lawyers and law firms to take another close, careful look at compliance with CTAPP, including the Client Trust Accounting Handbook.
As a refresher, existing rules authorize compliance reviews to be conducted by a certified public accountant at the licensee’s expense, if selected by the State Bar. Cal. R. Ct. 9.8.5(a)(2)(B). In addition, if selected by the State Bar, a compliance review may include an “investigative audit,” a notice of mandatory corrective action, and a referral for disciplinary action. Id.
Role of the Designated Licensee Among the proposed changes is the “designated licensee.” In a solo law practice, the designated licensee will be the solo practitioner. In a law firm that has established or maintained a client trust account, the designated licensee will be the licensee designated by the firm under California Business and Professions Code section 6091.3, which became effective on January 1, 2025. This new requirement provides that, for existing client trust accounts, on or before July 1, 2026, the State Bar “shall require” an attorney licensed to practice in California to furnish the State Bar license number to a financial institution where the attorney associated with the client trust account maintains the account. If the client trust account is maintained by a law firm, the law firm “shall designate one of its members to provide the member’s State Bar license number” to the financial institution. Proposed Rule 2.5(F) would provide that the “designated licensee” be reported to the financial institution. Should the licensee so designated by the firm leave or become ineligible to practice law or cease to do so, the client trust account must be closed, or the remaining licensees with the firm must assign a new designated licensee.
Under proposed Rule 2.5(E), specific designated licensee duties are proposed. The designated licensee “shall be the primary account holder or signatory.” Of significance, the designated licensee “shall be responsible for performing or supervising the monthly reconciliation of the trust account.” The monthly reconciliation of the written ledger, written journal and all bank statements must be maintained by a lawyer or law firm. Cal. Rules of Prof. Conduct, rule 1.15, Standards, 1(a)-1(d). The monthly reconciliation is described in detail in the State Bar’s Client Trust Accounting Handbook, available on the State Bar’s website, and step-by-step instructions are provided. State Bar of California, Monthly Reconciliation Preparer Instructions (Nov. 9, 2023), https://www.calbar.ca.gov/Portals/0/documents/ctapp/CTAPP-Resources-Preparer-Instructions.pdf.
The existing annual self-assessment requires that California lawyers certify that a written, monthly reconciliation of the bank statement, client ledger, and account journal are completed and maintained for each client trust account. It is proposed that the designated licensee is also responsible for answering any questions other licensees within the firm may have about the client trust account, however, this proposed responsibility would not absolve the other licensees of their duties under the Rules of Professional Conduct, or other CTAPP reporting requirements.
Compliance Reviews and Investigative Audits of Client Trust Accounts Proposed Rule 2.6 would establish a procedure for the State Bar’s further oversight of client trust accounts. If selected by the State Bar, a licensee must comply with and complete a trust account compliance review, an investigative audit, and any mandatory corrective actions resulting from the compliance review or investigative audit. In the event a licensee is selected, all licensees at the licensee’s firm must cooperate with requests for information, requests for responses to questions, and any mandatory corrective action plan.
A “compliance review” will encompass at least one year of client trust account activity. The licensee selected will have thirty days from the notice of selection to advise the State Bar of the State Bar-approved CPA selected to perform the compliance review. The proposed compliance review procedure would be established by the State Bar, and the CPA would work at the licensee’s expense. Within the same thirty days, the licensee would provide the records requested. Alternatively, the licensee targeted by the compliance review can identify the designated licensee or the primary account holder and signatory, and the licensees responsible for performing the monthly reconciliation. Beyond that, proposed Rule 2.6 creates a duty to cooperate and respond completely to questions, and to provide a signed statement of representations, and to acknowledge receipt of any findings within fourteen days.
Based on the compliance review, the State Bar may identify a licensee to participate in an investigative audit performed by the State Bar, which will encompass at least three years of trust account activity. Proposed Rule 2.6(B) investigative audit requirements dictate that the licensee provides records within fourteen days, although this may not be realistic for three years’ worth of records, depending on the scope of the audit. A proposed fourteen-day extension can be obtained for good cause. If entrusted funds are held in an account other than a client trust account, the licensee must produce records related to the non-trust account.
The State Bar’s Office of Chief Trial Counsel also has the power to issue subpoenas for trust accounting records in conducting an investigation. Under governing rules, the subpoena must be disclosed to the lawyer thirty days after receiving the records. The attorney may, within fifteen days of receiving the notice, request a statement of reasons for the examination of the attorney’s trust account financial records.
Confidentiality Proposed Rule 2.6 provides that information and communications in connection with a compliance review or audit shall remain confidential unless disclosure is required by law, or to fulfill the State Bar’s licensing, regulatory, and disciplinary functions, including investigation or formal proceedings concerning alleged misconduct of a licensee or law firm. The State Bar can disclose otherwise confidential information to prosecutors if the investigation reveals misconduct that may subject a licensee to criminal prosecution, as well as to members of the Judicial Nominees Evaluation Commission, under Business and Professions Code Section 6144.5.
Proposed Consequences of Non-Compliance for Licensees and Their Supervisors Under Proposed Rule 2.6, a compliance review or investigative audit may yield a mandatory corrective action plan, which must be implemented by the licensee, designated licensee, and verified to the State Bar. In the event the licensee fails to comply with the compliance review or requirements for the investigative audit, or to provide timely responses to requests for records, or to comply with the mandatory corrective action as directed, they are “deemed to be noncompliant.” Proposed Rule 2.6(F) provides that in that event, “any attorney with supervising or managerial responsibility over the licensee may also be deemed noncompliant.”
What does this mean for law firm managers? Lawyers with managerial authority in a law firm “shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance” that all lawyers in the firm comply with the Rules of Professional Conduct (CRPC) and the State Bar Act. Cal. Rules of Prof. Conduct, rule 5.1. Lawyers with managerial authority in a law firm must establish internal policies and procedures designed to account for client funds and property. Cal. Rules of Prof. Conduct, rule 5.1, Comment [1].
Discipline The disciplinary consequences for not handling a client trust account properly can be very serious. The presumed sanctions for specific misconduct provide a starting point for establishing the level of discipline for violations of the client trust accounting rules, which may be adjusted up or down depending on aggravating or mitigating factors. The presumed sanction for intentional misappropriation of funds is disbarment, while actual suspension is the presumed sanction for misappropriation involving gross negligence. The presumed sanction for misappropriation not involving gross negligence or intentional conduct is suspension or reproval. Actual suspension for three months is the presumed sanction for commingling, failure to deposit funds into a client trust account, or failure to promptly pay out entrusted funds. The presumed discipline for other violations of Rule 1.15, including Rule 15(d), is suspension or reproval.
Examining your own compliance with client trust accounting rules and procedures, and promptly rectifying any issues that are discovered, including making restitution as appropriate, will likely be viewed positively by the State Bar. Properly addressing office procedures regarding client trust accounting and correcting any problems prior to any State Bar audit or investigation may be viewed favorably in any disciplinary action. See McCray v. State Bar, 38 Cal. 3d 257, 274 (1985).
Given the State Bar’s proposals, it is likely lawyers and law firms will see an increase in the State Bar’s investigative activity related to client trust accounts. Now is a good time to review compliance and management of your trust accounting functions.
Carole J. Buckner is of counsel to Wilson, Elser, Moskowitz, Edelman & Dicker, LLP in the firm’s San Diego office. She is a member of the OCBA’s ethics committee.