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Bar News - October 15, 2014


New Trust Accounting Rules Require Prompt Attention

By:

Mistakes in the management of client trust accounts have been the leading cause of attorney discipline in New Hampshire for the last several years, so reviewing the new trust accounting rules that went into effect June 1 is important for all managing attorneys and solo practitioners.

Trust fund cases often result in severe sanctions, including lengthy suspensions and disbarment. Because of this, it has always been important for managing attorneys and solos to regularly review their firm’s trust fund accounting and management practices, but there is an even greater need now.

In an April 4 order, the NH Supreme Court amended the requirements for client trust accounting, and the new rules took effect this spring. Many of the changes are technical and designed to modernize the requirements. However, there are several, like the bonding requirement, that are new and require prompt attention. This article describes some of these recent changes and offers compliance suggestions.

Bonding Requirement

Under new Supreme Court Rule 50(2)(C), only lawyers admitted in New Hampshire or “to the extent [they are] bonded, a person under direct supervision of the lawyer” may be an authorized signatory or may authorize transactions. The rule further requires that all electronic transfers from a client trust account have specific authorization of a New Hampshire lawyer or a properly bonded and designated person.

Attorneys designated as supervisors of bonded non-lawyers will now be directly responsible for all transaction authorized by the non-lawyers. This is a more rigorous standard than the general standard for supervision of non-lawyers articulated under the rules of professional conduct. See N.H. Rules of Prof’l Conduct, Rule 5.3 (“lawyer shall make reasonable efforts to ensure that the person’s conduct is compatible with the professional obligations of the lawyer…”).

The most frequent question we receive about this requirement relates to the required amount of the bond. The rule is silent on this point. While at first this may seem unhelpful, one must recognize that the size of the bond will differ with the firm size and nature of the firm’s practice. In light of this, the Supreme Court apparently felt it could not provide bright-line guidance.

The bonding rule seems, in part, to serve as a reminder to the firm of its responsibility to supervise non-lawyers. The Court seems to be relying on this and the enhanced liability it has placed on the supervising attorneys to encourage firms to purchase an adequate bond.

We recommend that firms purchase a bond in sufficient amount to cover the types of losses a nefarious employee might inflict. A lawyer or firm faced with a disciplinary charge based on trust fund violations will want to be able to show the Attorney Discipline Office that it has made efforts to protect its clients by purchasing a fair bond and that it has reimbursed fully any aggrieved clients. Reimbursement is a significant factor in assessing sanctions and often can impact how the case is analyzed and handled by the disciplinary office.

Changes to Recordkeeping Requirements

There are a number of recordkeeping changes. They include:

  • All receipts must now be deposited intact with appropriate records.
  • Withdrawals may no longer be made in cash. They must be by check payable to a named payee.
  • The new rule retains the core documents from the old system: 1) Overall account receipt and disbursement journal; 2) Individual client’s ledger card; and 3) Monthly reconciliations. But it adds specific information that was not explicitly required in the prior rule. For example, the old rule only required the ledger system to show all receipts and disbursements “with appropriate entries identifying the source of the receipts and nature of the disbursement’” whereas the new rule requires “the date, source, and description of each item deposited as well as the date, payee and purpose of each disbursement.” Sup. Ct. R. 50(2)(B)(i).
  • The new rule requires certain supporting information to be retained in addition to the above documents. They include: 1) Copies of accountings to clients; 2) Copies of records showing disbursements; 3) Physical or electronic equivalent of all checkbook registers, statements, records of deposits and cancelled checks provided by the financial institutions; and 4) Detailed records of all electronic transfers. Sup. Ct. R. 50(2)(B).

Note that the above records must be retained for six years and may be maintained by electronic or other media, as long as printed copies can be produced. This section of the rule helps move recordkeeping into the modern era. However, firms should be aware that electronic records held by banks or other third parties may not be available to the firm once an account is closed or after some period of time. This rule allows use of electronic resources, but only if they are under the firm’s control. It is the firm’s responsibility to be sure it can produce the records.

Account Reconciliation

The new rule provides more specificity to what has always been the key to trust fund compliance; the monthly account reconciliation. Sup. Ct. R. 50(C)(vi). The rule specifies that reconciliation must be done on a monthly basis by the lawyer or firm and must include: 1) the balance on the bank’s records, 2) the law firm’s balance, 3) a detailed listing of any discrepancies, as well as 4) reconciliation of the account with the individual client ledger sheets.

Based on the reported ADO cases and our practice group’s work over the last few years, this crucial procedure is often not done adequately or with sufficient attention to detail.

A good reconciliation, carefully prepared and then reviewed by the designated attorney, provides the best protection against inadvertent mistakes. While it alone may not be enough to control criminal conduct by an employee, it is certainly an irreducible minimum control.


Mitch Simon

Lee Smith

Josh Wyatt

Mitch Simon is a law professor at the University of New Hampshire School of Law and a member and co-chair of Devine Millimet’s Attorney Conduct, Liability and Professionalism Group. He has been on the NHBA Ethics committee for 24 years.

Lee Smith is a shareholder and member of Devine Millimet’s litigation department representing municipalities, businesses, and individuals in a variety of litigation matters in state and federal court.

Josh Wyatt is a member of Devine Millimet’s litigation department. He represents plaintiffs and defendants in complex commercial litigation.

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