Hawaii Rules Governing Trust Accounting

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HAWAI'I RULESGOVERNINGTRUST ACCOUNTING(SCRU-13-0004270)Adopted and Promulgated bythe Supreme Courtof the State of Hawai'iComments and commentary are provided by the rules committeefor interpretive assistance. The comments and commentary expressthe view of the committee and are not binding on the courts.Adopted November 8, 1991As amended October 21, 2013Effective January 1, 2014With Amendments as NotedThe JudiciaryState of Hawai'i

RULES GOVERNING TRUST ACCOUNTINGTable of ContentsRule 1.PURPOSE AND SCOPERule 2.RESERVEDRule 3.APPLICABILITYRule 4.TRUST ACCOUNT REGULATIONS AND MINIMUM TRUSTACCOUNTING RECORDSRule 5.MINIMUM TRUST ACCOUNT PROCEDURESRule 6.IMMEDIATE REPORTING OF CERTAIN DISCREPANCIES ANDRETURNED CHECKSRule 7.ANNUAL CERTIFICATE AND REPORTRule 8.AUDIT(Release: 12/13)i

Table of ContentsRULES GOVERNING TRUST ACCOUNTING(This page intentionally left blank.)ii(Release: 12/13)

RULES GOVERNING TRUST ACCOUNTINGRule 1. PURPOSE AND SCOPE.These Rules describe the minimum trustaccounting records to be maintained and theminimum trust procedures to be followed by allparticipants in the Trust Account Program.Rule 2. RESERVED.Rule 3. APPLICABILITY.These Rules apply to all attorneys and law firmswhich receive client funds that, under Rule 11 of theRules of the Supreme Court of the State of Hawai‘i,must be deposited in a trust account.(Amended December 16, 2013, effective January1, 2014.)Rule 4. TRUST ACCOUNT REGULATIONSANDMINIMUMTRUSTACCOUNTING RECORDS.(a) A lawyer in possession of any funds or otherproperty belonging to a client or third person, wheresuch possession is incident to the lawyer’s practiceof law, is a fiduciary and shall not commingle suchfunds or property with his or her own ormisappropriate such funds or property to his or herown use and benefit. In keeping with that fiduciaryduty, all client funds paid to an attorney or law firm,including advances for costs and expenses, shall bedeposited and maintained in one or more identifiableclient trust accounts established pursuant to Rule 11of the Rules of the Supreme Court of the State ofHawai‘i. No funds belonging to the attorney or lawfirm shall be deposited or maintained in a client trustaccount except:(1) funds reasonably sufficient to either pay bankcharges or avoid paying bank charges on the accountor to cover unanticipated overages, and(2) funds belonging in part to a client and in partpresently or potentially to the attorney, though suchfunds shall be withdrawn promptly by the attorneywhen earned or upon resolution of any dispute overownership of said funds, to avoid commingling ofattorney and client funds.Such client trust accounts shall be kept inHawai‘i in accordance with Rule 11 of the Rules ofthe Supreme Court of the State of Hawai‘i and Rule1.15 of the Hawai‘i Rules of Professional Conduct,and in the lawyer’s name, in the name of apartnership of lawyers, or in the name of the(Release: 12/13)Rule 4professional corporation of which the lawyer is amember, and each trust account, as well as depositslips and checks drawn thereon, shall be prominentlylabeled “client trust account.” All funds entrusted toa lawyer shall be deposited intact into the trustaccount. All fees shall be maintained in trust untilearned and are refundable until earned, but must bewithdrawn by the attorney as earned to avoidcommingling. All earned client funds shall betransferred to the attorney’s or law firm’s businessaccount in a manner which allows records of suchtransfers to be maintained pursuant to Rules 4(c) and(d) of this Rule.(b) All trust account withdrawals shall be madeonly by authorized electronic bank transfer or bycheck payable to a named payee and not to cash.Only an attorney admitted to practice law in this stateshall be an authorized signatory on a client trustaccount. Earned fees withdrawn from a trust accountshall be distributed by check or authorized electronictransfer only to the named lawyer, law partnership,or professional law corporation. No personal or nonclient business expenses of the lawyer, lawpartnership, or professional law corporation shall bepaid directly from the trust account.(c) Every attorney and law firm who practices inthis jurisdiction and maintains a trust account shallmaintain complete current financial records of theaccount for at least 6 years after either completion ofthe employment to which they relate, or the lasttransaction on the account, whichever occurs last.Such records shall include:(1) Receipt and disbursement journalscontaining a record of deposits to and withdrawalsfrom bank accounts which concern or affect thelawyer’s practice of law, including a practice’sbusiness accounts, specifically identifying checknumbers, and the date, source, and description ofeach item deposited, and the date, payee, and purposeof each disbursement;RGTA--1

Rule 4RULES GOVERNING TRUST ACCOUNTING(2) Ledger records for all trust accounts requiredby this Rule showing, for each separate trust client orbeneficiary, the source of all funds deposited, thenames of all persons for whom the funds are or wereheld, the amount of such funds, the descriptions andamounts of charges or withdrawals, relevant checknumbers, and the names of all persons or entities towhom such funds were disbursed;(3) Copies of retainer and compensationagreements with clients as required by this Rule orby Rule 1.5 of the Hawai'i Rules of ProfessionalConduct;(4) Copies of accountings to clients or thirdpersons showing the disbursement of funds to themor on their behalf;(5) Copies of bills for legal fees and expensesrendered to clients;(6) Copies of records showing disbursements onbehalf of clients;(7) The physical or electronic equivalents of allcheckbook registers or check stubs, bank statements,records of deposit (which shall be sufficientlydetailed to identify each item), prenumberedcanceled checks or their equivalent which clearlybear the legend “client trust account,” and substitutechecks provided by the institution;(8) Copies of all monthly trust accountreconciliations and all records showing, at leastquarterly, a listing of all clients for whom the lawyerholds money in any client trust account, with eachclient’s related balance, the grand total of whichequals the reconciled trust account balance on thebank statement covering the same period;(9) Records of all electronic transfers from clienttrust accounts, including the name of the personauthorizing the transfer, the date of the transfer, thename of the recipient and confirmation from thefinancial institution of the trust account number fromwhich money was withdrawn and the date and timethe transfer was completed; and(10)Copies of those portions of clients’ filesthat are reasonably necessary for an understanding ofthe financial transactions pertaining to them.(d) Records required by these Rules may bemaintained by electronic, photographic, computer, orother media, provided that they otherwise complywith these Rules and provided further that printedcopies can be produced. If maintained electronically,the records shall be backed-up on a regular andRGTA--2frequent basis. The financial books and otherrecords required by these Rules shall be maintainedon a cash method consistently applied from year toyear. All records, including bookkeeping records, ifstored in a physical form, shall be located at theprincipal Hawai'i office of each lawyer, lawpartnership, or professional law corporation or in areadily accessible location, or, if storedelectronically, shall be readily available, and shall beavailable for inspection, review for compliance withthese Rules, and copying at that location by a dulyauthorized representative of the Office ofDisciplinary Counsel.(e) Upon dissolution of any parternship oflawyers or any legal professional corporation orother entity, the partners, shareholders, or otherprincipals shall make appropriate arrangements forthe maintenance of the records specified in paragraph(c), above. Upon the sale of a law practice, the sellershall make appropriate arrangements for themaintenance of the records specified in paragraph(c), above.COMMENT:[1] Rule 4 of these Rules enumerates thebasic financial records that a lawyer mustmaintain with regard to the business andtrust accounts of a law firm. These includethe standard books of account and thesupporting records that are necessary tosafeguard and account for the receipt anddisbursement of client funds as required bythese Rules. These records shall bemaintained by the lawyer for a period of 6years after termination of each particularlegal engagement or representation, or thelast transaction on the account, whicheveroccurs later.[2] Rule 4(b) enumerates minimalaccounting controls for client trust accounts.It also enunciates the requirement that onlya lawyer admitted to the practice of law inthe jurisdiction shall be the authorizedsignatory or authorize electronic transfersfrom a client trust account. The lawyer hasa non-delegable duty to protect and preservethe funds in a client trust account and can bedisciplined for failure to supervisesubordinates who misappropriate client(Release: 12/13)

RULES GOVERNING TRUST ACCOUNTINGfunds. See Rules 5.1 and 5.3 of the Hawai'iRules of Professional Conduct.[3] Authorized electronic transfers shallbe limited to (1) money required for paymentto a client or third person on behalf of aclient, (2) expenses properly incurred onbehalf of a client, such as filing fees orpayment to third persons for servicesrendered in connection with therepresentation, (3) money transferred to thelawyer for fees that are earned in connectionwith the representation and are not indispute; or (4) money transferred from oneclient trust account to another client trustaccount.The requirement in paragraph (a) thatreceipts shall be deposited intact mean thata lawyer cannot deposit one check ornegotiable instrument into two or moreaccounts at the same time, a practicecommonly known as a split deposit.[4] Rule 4(c)(7) of these Rules requiresthat the physical or electronic equivalents ofall checkbook registers, bank statements,records of deposit, pre-numbered canceledchecks or check stubs, and substitute checksbe maintained for a period of 6 years aftertermination of each legal engagement orrepresentation, or the last transaction on theaccount, whichever occurs later. The“Check Clearing for the 21st Century Act”or “Check 21 Act,” codified at 12U.S.C.§5001 et. seq., recognizes “substitutechecks” as the legal equivalent of anoriginal check. A “substitute check” isdefined at 12 U.S.C. §5002(16) as a “paperreproduction of the original check thatcontains an image of the front and back ofthe original check; bears a magnetic inkcharacter recognition (MICR) linecontaining all the information appearing onthe MICR line of the original check;conforms with generally applicable industrystandards for substitute checks; and issuitable for automated processing in thesame manner as the original check.” Banks,as defined in 12 U.S.C. §5002(2), are notrequired to return to customers the originalcanceled checks. Most banks now provide(Release: 12/13)Rule 4electronic images of checks to customerswho have access to their accounts oninternet-based websites. It is the lawyer’sresponsibility to download electronicimages. Electronic images shall bemaintained for the requisite number of yearsand shall be readily available for printingupon request or shall be printed andmaintained for the requisite number ofyears.[5] The ACH (Automated ClearingHouse) Network is an electronic fundstransfer or payment system that primarilyprovides for the inter-bank clearing ofelectronic payments between originating andreceiving participating financial institutions.ACH transactions are payment instructionsto either debit or credit a deposit account.ACH payments are used in a variety ofpayment environments including billpayments, business-to-business payments,and government payments (e.g. tax refunds.)In addition to the primary use of ACHtransactions, retailers and third parties usethe ACH system for other types oftransactions, including electronic checkconversion (ECC). ECC is the process oftransmitting encoded information from thebottom of a check and converting checkpayments to ACH transactions, dependingupon the authorization given by the accountholder at the point-of-purchase. In this typeof transaction, the lawyer should be carefulto comply with the requirements of Rule4(c)(9) of these Rules.RGTA--3

Rule 4RULES GOVERNING TRUST ACCOUNTING[6] There are 5 types of checkconversions where a lawyer should becareful to comply with the requirements ofRule 4(c)(9) of these Rules . First, in a“point-of-purchase conversion,” a papercheck is converted into a debit at the point ofpurchase and the paper check is returned tothe issuer. Second, in a “back-officeconversion,” a paper check is presented atthe point of purchase and is later convertedinto a debit and the paper check isdestroyed. Third, in an “account-receivableconversion,” a paper check is converted intoa debit and the paper check is destroyed.Fourth, in a “telephone-initiated debit” or“check-by-phone” conversion, bank accountinformation is provided via the telephoneand the information is converted to a debit.Fifth, in a “web-initiated debit,” anelectronic payment is initiated through asecure web environment. Rule 4(c)(9) ofthese Rules applies to each of the type ofelectronic funds transfers described. Allelectronic fund transfers shall berecorded and a lawyer should not re-use acheck number which has been previouslyused in an electronic transfer transaction.[7] The potential of these records toserve as safeguards is realized only if theprocedures set forth in Rule 4(c)(8) of theseRules are regularly performed. The trialbalance is the sum of balances of eachclient's ledger card (or the computerizedequivalent). Its value lies in comparing it ona monthly basis to a control balance. Thecontrol balance starts with the previousmonth's balance, then adds receipts from theTrust Receipts Journal and subtractsdisbursements from the Trust DisbursementsJournal. Once the total matches the trialbalance, the reconciliation readily followsby adding amounts of any outstandingchecks and subtracting any deposits notcredited by the bank at month's end. Thisbalance should agree with the bankstatement. Quarterly reconciliation isrecommended only as a minimumrequirement; monthly reconciliation is thepreferred practice given the difficulty ofRGTA--4identifying an error (whether by the lawyeror the bank) among three months'transactions.[8]Insome situations,documentation in addition to that listed inparagraphs (c)(1) through (c)(9) of Rule 4 isnecessary for a complete understanding of atrust account transaction. The type ofdocument that a lawyer must retain underparagraph Rule 4(c)(10) because it is“reasonably related” to a client trusttransaction will vary depending on thenature of the transaction and thesignificance of the document in sheddinglight on the transaction. Examples ofdocuments that typically must be retainedunder this paragraph includecorrespondence between the client andlawyer relating to a disagreement over feesor costs or the distribution of proceeds,settlement agreements contemplatingpayment of funds, settlement statementsissued to the client, documentation relatingto sharing litigation costs and attorney feesfor subrogated claims, agreements fordivision of fees between lawyers, guaranteesof payment to third parties out of proceedsrecovered on behalf of a client, and copiesof bills, receipts or correspondence relatedto any payments to third parties on behalf ofa client (whether made from the client’sfunds or from the lawyer’s funds advancedfor the benefit of the client).[9] Rule 4(d) allows the use ofalternative media for the maintenance ofclient trust account records if printed orelectronically transmittable copies ofnecessary reports can be produced. If trustrecords are computerized, a system ofregular and frequent (preferably daily)back-up procedures is essential. If a lawyeruses third-party electronic or internet-basedfile storage, the lawyer must makereasonable efforts to ensure that thecompany has in place, or will establish,reasonable procedures to protect theconfidentiality of client information. SeeABA Formal Ethics Opinion 398 (1995).Records required by Rule 4 of these Rules(Release: 12/13)

RULES GOVERNING TRUST ACCOUNTINGshall be readily accessible and shall bereadily available to be produced uponrequest by the client or third person who hasan interest as provided in Rule 1.15 of theHawai'i Rules of Professional Conduct, orby the official request of the Office ofDisciplinary Counsel, including but notlimited to, a subpoena duces tecum.Personally identifying information inrecords produced upon request of the clientor third person or by the Office ofDisciplinary Counsel shall remainconfidential and shall be disclosed only in amanner to ensure client confidentiality asotherwise required by law or court rule.[10] Rule 4(e) provides for thepreservation of a lawyer’s client trustaccount records in the event of dissolutionor sale of a law practice. Regardless of thearrangements the partners or shareholdersmake among themselves for maintenance ofthe client trust records, each partner may beheld responsible for ensuring the availabilityof these records. For the purpose of theseRules, the terms “law firm,” “partner,” and“reasonable” are defined in accordancewith Rules 1.0 (d), (g), and (i) of the Hawai'iRules of Professional Conduct.(Amended December 16, 2013, effective January1, 2014.)Rule 5. M I N I M U MTRUST ACCOUNTPROCEDURES.Every attorney and law firm that maintains atrust account shall require periodic statements fromthe financial institution with respect to each suchaccount no less than quarterly. Within 45 days of thereceipt of each such statement, the attorney or lawfirm shall reconcile such statement with the booksand records of the attorney or law firm. The attorneyor law firm shall, within 60 days of receipt of thestatement, take steps to correct any discrepancies thatmay exist. In the event of a discrepancy between thefinancial institution's statement and the books andrecords of the attorney or law firm, records of thediscrepancy and of the corrective action shall bemaintained as part of the records required under Rule4 of these Rules.(Release: 12/13)Rule 7COMMENT:See Comment [7] to Rule 4 of theseRules for a description of the suggestedprocedures for reconciling the attorney’sclient trust account records with the accountstatements supplied by the financialinstitution maintaining the account.Rule 6. I M M E D I A T E R E P O R T I N G O FCERTAIN DISCREPANCIES ANDRETURNED CHECKS.Every attorney and law firm shall, within 10working days after learning of either (i) anydiscrepancy in any trust account which is in excessof 100.00 or (ii) any trust account check beingreturned for insufficient funds, notify the Office ofDisciplinary Counsel of the event. The notificationshall be in writing, shall explain the event and itscause(s), if known, and shall be sent by certifiedmail. This requirement shall apply both to any trustaccount maintained by the attorney or law firm andto any trust account maintained by any other attorneyor law firm of which an attorney has knowledge.Rule 7. A N N U A L C E R T I F I C A T E A N DREPORT.As part of the annual attorney registrationstatement required by Rule 17(d) of the Rules of theSupreme Court of the State of Hawai'i, each attorneyor law firm shall file each year a certificate of annualcompliance with the trust accounting procedures andrecord keeping procedures of these Rules and Rule1.15 of the Hawai'i Rules of Professional Conductfor the immediately preceding calendar year. Thecertificate shall contain the name of the lawyer orlaw firm listed on the account, the trust accountname, the trust account number, the financialinstitution’s name and address, and the attorney’sBar number. All information contai

trust accounts of a law firm. These include the standard books of account and the supporting records that are necessary to safeguard and account for the receipt and disbursement of client funds as required by these Rules. These records shall be maintained by the lawyer for a period of 6 years after termination of each particular

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