It was some years ago on a trip to San Francisco when I first had the experience of a cashless taxi ride. I always brought cash with me to pay for cab rides in from the airport, but this time I saw a sign that the driver accepted credit cards. At the end of the ride I handed my card to the driver and noticed that the driver attached a reader to her smartphone, swiped my card, and emailed me my receipt. While electronic payments were nothing new, I appreciated the ease and convenience of the mobile transaction.
At the time, if someone would have suggested that lawyers in Wisconsin would, in a few years, be able to accept payments from clients in the same way, I would have laughed. For starters, the disciplinary rules at the time prohibited electronic payments into trust accounts and that did not seem likely to change soon. But times do change.
Although not quite as easy as the taxi transaction, the new trust account rule, does, with certain safeguards, permit lawyers to take advantage of modern banking and payment systems.
Overview of Fee and Trust Rule Changes
On April 4, 2016, the Wisconsin Supreme Court adopted, in substantial part, Rules Petition 14-07, which was filed by the Office of Lawyer Regulation (OLR) in December 2014. The petition was the result of several years of work by an OLR committee to review the current Rules of Professional Conduct for Attorneys (the “rules” or “SCRs”) and propose amendments to bring the rules governing lawyers’ handling of fees and trust property more in line with modern banking practices. The State Bar of Wisconsin Board of Governors unanimously supported the petition. The order adopts proposed changes to SCR 20:1.0 (Terminology), SCR 20:1.5 (Fees), SCR 20:1.15 (Trust Accounts), and SCR 22.39 (Burden of Proof).
The new rules took effect on July 1, 2016. The new rule is permissive rather than restrictive. That is to say, the changes to the rules in large part do not require lawyers to stop doing anything. Rather, the changes permit lawyers to do things that were prohibited under previous rules. For example, a lawyer using a traditional trust account and making deposits and disbursements by check will not have to change anything under the new rules.
Fee Rule. With respect to SCR 20:1.5, the fee rule, the most significant change is that the provisions in the former SCR 20:1.15(b)(4m) that governed the “alternative protection for advanced fees” and permitted lawyers to place advanced fee payments in the operating account rather than trust account with certain disclosures and the provisions in the former SCR 20:1.15(g) that govern withdrawal of earned fees from trust have been moved to the new SCR 20:1.5. Thus, there is no substantive change, but the rules governing lawyers’ handling of fees have been consolidated in one rule. Also, there is guidance in the new comment to SCR 20:1.5 with respect to advanced fee payments from third parties. A future article will discuss the fee rule.
Trust Account Rule. With respect to the new trust account rule, there are many changes. Perhaps the most significant is that, under certain circumstances, lawyers will be able to make electronic transfers into and out of standard IOLTA accounts, which was prohibited under the former rule. Another very significant change is that the detailed record-keeping requirements for trust accounts have been removed from the rule and are now simply advisory guidelines. The new rule does require that lawyers keep complete records of trust accounts, but does not mandate the specific form those records must take. While lawyers may still be subject to discipline for keeping inadequate records, lawyers may no longer be subject to discipline for failing to keep the precise records mandated by the former rule. Further, lawyers may be able to use commercially available record-keeping products that were previously not usable because they did not meet every requirement of the prior rule.
The new rule also allows lawyers, if certain safeguards are followed, to use the primary IOLTA account for most electronic banking (e-banking) transactions. This was specifically prohibited by the former rule and now permits lawyers to, for example, accept credit card and Paypal payments with only a compliant IOLTA and a business account. The new rule also continues to permit lawyers to establish an e-banking trust account (formerly called a “credit card trust account”) solely for the purpose of receiving and disbursing electronic payments. This option continues to require that lawyers have a standard IOLTA account in addition to the e-banking trust account, but the new rule permits lawyers to make electronic transfers from the e-banking account to the standard IOLTA account.
Thus, the new trust account and fee rules allow lawyers to do many things that were formerly prohibited and potentially cuts down on paper work by allowing lawyers to avoid mandated trust account record-keeping requirements. The easing of prior restrictions does much as well to facilitate ease of use and mobility, permitting lawyers to accept forms of payment through mobile devices provided appropriate safeguards are implemented. While Wisconsin’s trust account rule is still complex, the changes do much to modernize the regulation of lawyer trust accounts.
Additionally, there are minor changes to SCR 20:1.0 (Terminology) and other provisions of the trust account rule. This article is not a comprehensive discussion of all the changes in the new rules. It is, rather, an attempt to provide an overview of some of the most significant and immediate changes in the new trust account rule. Lawyers are strongly encouraged to read the new rules and comments in their entirety.
This article is based on an article written to explain the significant changes made in 2007, and relevant portions of that older article are retained. This current article discusses the highlights of the new trust account rule. Because of the length of the new trust account rule, portions are excerpted herein rather than reprinting the entire rule.
Important caveat: This article was written in consultation with the OLR, but it represents the personal opinions of the author, and is not binding on any court or the OLR. As with any new law, some questions will have to be resolved over time.
Highlights of the New Trust Account Rule SCR 20:1.15
The new trust account rule defines electronic transactions. No such definition existed in the previous rule, and SCR 20:1.15(a) now states:
“(2) ‘Electronic transaction’ means a paperless transfer of funds to or from a trust or fiduciary account. Electronic transactions do not include transfers initiated by voice or automated teller or cash dispensing machines.”
This new definition is important because the new rule provides lawyers with significantly more flexibility with respect to electronic transactions in connection with trust accounts, as discussed below. It is also important to remember that transfers or withdrawals by telephone or automated teller remain prohibited.
The new trust account rule explicitly puts the responsibility for trust account transactions on lawyers who exercise control over the trust account. The newly created SCR 20:1.15(f) states:
“(1) Security of transactions. A lawyer is responsible for the security of each transaction in the lawyer’s trust account and shall not conduct or authorize transactions for which the lawyer does not have commercially reasonable security measures in place. A lawyer shall establish and maintain safeguards to assure that each disbursement from a trust account has been authorized by the lawyer and that each disbursement is made to the appropriate payee. Only a lawyer admitted to practice law in this jurisdiction or a person under the supervision of a lawyer having responsibility under SCR 20:5.3 shall have signatory and transfer authority for a trust account.”
This newly created subsection imposes the responsibility on lawyers to appropriately supervise the handling of trust accounts and to ensure that commercially reasonable security measures are in place for each transaction. “Commercially reasonable security measures” are referenced in several places in the rule and aimed primarily at electronic transactions. The rule does not define “commercially reasonable security measures” but the concept is discussed later in this article. It is also noteworthy that this section now explicitly recognizes that lawyers may delegate signatory authority to nonlawyers in the firm, provided that the lawyer is appropriately supervising the nonlawyer as required by SCR 20:5.3 (Responsibilities regarding nonlawyer assistants).
Also of Interest
Applying the New E-banking Trust Account Rule to Your Practice
A new amendment to the Wisconsin Rules of Professional Conduct effective July 1, 2016, allows attorneys to use e-banking for trust and fiduciary account deposits and disbursements. At E-Banking Under the Wisconsin Trust Account Rule, a State Bar of Wisconsin PINNACLE® webcast, find out how the new rule affects your banking experience, including:
- Obligations for lawyers using e-banking
- How to maintain proper records for electronic trust account transactions
- Using security measures to protect funds
- Electronic banking strategies for managing trust account funds
- Transactions that are prohibited under the new rule
Streamline your transactions while providing better service to your clients with e-banking.
E-Banking Under the Wisconsin Trust Account Rule webcast replays are scheduled for Monday, Aug. 22, 2016, 12:00 – 1:30 p.m., and Thursday, Sept. 1, 2016, 12:00 – 1:30 p.m. Earn 1.5 CLE credits, including 1.5 ethics and professional responsibility credits. Tuition: State Bar members – $109; nonmembers – $159; Ultimate Pass subscribers: $0.
The new rule continues the general prohibition on electronic transfers into or out of trust accounts. SCR 20:1.15(f)(3) now states:
“(3) Electronic transactions. A lawyer shall not make deposits to or disbursements from a trust account by way of an electronic transaction, except as provided in SCR 20:1.15(f)(3)a. through c.”
While the prohibition on electronic disbursements and deposits is carried over from the former rule, there are three significant exceptions that are discussed directly below.
The new rule now permits lawyers to make remote deposits into trust accounts. Remote deposit refers to the ability to deposit a check into a bank account from a remote location, such as an office or home, without having to physically deliver the check to the bank. This is typically accomplished by scanning a digital image of a check into a computer, then transmitting that image to the bank. Sometimes the original check is then immediately returned by a merchant using remote deposit to the issuer. Remote deposits were previously prohibited because of the prohibition on electronic transactions. SCR 20:1.15(f)(3) now states:
“a. Remote Deposit. A lawyer may make remote deposits to a trust account, provided that the lawyer keeps a record of the client or matter to which each remote deposit relates, and that the lawyer’s financial institution maintains an image of the front and reverse of each remote deposit for a period of at least six years.”
Note that this new provision allows lawyers to deposit checks to a trust account through a banking app on a smartphone provided the record-keeping and account security requirements are met.
The new trust account rule continues the provision that permits lawyers to establish a separate trust account exclusively for electronic transactions, but with some new twists. The former trust account rule permitted lawyers to establish a “credit card trust account,” in addition to the lawyer’s primary IOLTA account, for the purpose of receiving fee and cost advances by electronic transaction. The former rule, however, limited the use of the credit card trust account to receipt of such payments and required the lawyer to transfer the funds out of the credit card trust account to the appropriate account by check. SCR 20:1.15(f)(3) now states:
“b. E-Banking Trust Account. A lawyer may accept funds paid by credit card, debit card, prepaid or other types of payment cards, and other electronic deposits, and may disburse funds by electronic transactions that are not prohibited by sub. (f)(2)c., provided that the lawyer does all of the following:
1. Maintains an IOLTA account, which shall be the primary IOLTA account, in which no electronic transactions shall be conducted other than those transferring funds from the primary IOLTA to the E-Banking Trust Account for purposes of making an electronic disbursement, or those transactions authorized by SCR 20:1.15(f)(3)a., (3)b.4.a., and (3)b.4.d.
2. Maintains a separate IOLTA account with commercially reasonable account security for electronic transactions, which shall be entitled: ‘E-Banking Trust Account.’
3. Holds lawyer or law firm funds in the E-Banking Trust Account reasonably sufficient to cover monthly account fees and fees deducted from deposits and maintains a ledger for those account fees.
4. Transfers the gross amount of each deposit within 3 business days after the deposit is available for disbursement, and if necessary, adds funds belonging to the lawyer or law firm to cover any deduction of fees and surcharges relating to the deposit, in accordance with all of the following:
a. All advanced costs and advanced fees held in trust under SCR 20:1.5(f) shall be transferred to the primary IOLTA account by check or electronic transaction.
b. Earned fees, cost reimbursements, and advanced fees that are subject to the requirements of SCR 20:1.5(g) shall be transferred to the business account by check or by electronic transaction.
c. Any funds that the client has directed be disbursed by electronic transfer shall be promptly disbursed from the E-Banking Trust Account by electronic transaction.
d. All funds received in trust other than funds identified in SCR 20:1.15(f)(3)a., b., and c. shall be transferred to the primary IOLTA account by check or by an electronic transaction.
e. Except for funds identified in SCR 20:1.15(f)(3)a. and b., a lawyer or law firm shall not be prohibited from deducting electronic transfer fees or surcharges from the client’s funds, provided the client has agreed in writing to accept the electronic payment after being advised of the anticipated fees and surcharges.
5. Identifies the client matter and the reason for disbursement on the memo line of each check used to disburse funds; records in the financial institution’s electronic payment system the date, amount, payee, client matter, and reason for the disbursement for each electronic transaction; and makes no disbursements by credit card, debit card, prepaid or other types of payment cards, or any other electronic payment system that does not generate a record of the date, amount, payee, client matter, and reason for the disbursement in the financial institution’s electronic payment system.
6. Replaces any and all funds that have been withdrawn from the E-Banking Trust Account by the financial institution or card issuer, and reimburses the account for any shortfall or negative balance caused by a chargeback, surcharge, or ACH reversal within 3 business days of receiving actual notice that a chargeback, surcharge, or ACH reversal has been made against the E-Banking Trust Account; and reimburses the E-Banking Trust Account for any chargeback, surcharge, or ACH reversal prior to accepting a new electronic deposit or transferring funds from the primary IOLTA to the E-Banking Trust Account for purposes of making an electronic disbursement.”
Questions about the New Trust Rules? Call the Ethics Hotline
State Bar of Wisconsin ethics counsel Tim Pierce and assistant ethics counsel Aviva Kaiser can help answer your questions or resolve your ethics dilemma. The Ethics Hotline is available Monday – Friday, 9 a.m. – 4 p.m., (608) 229-2017 or (800) 254-9154.
Thus, the new rule permits several previously forbidden practices. First, while lawyers previously had to transfer funds from the “credit card trust account” to the IOLTA or business account by check, the new rule permits such transfers to be done electronically as well as by check. Second, lawyers may now use the “E-Banking Trust Account” to make electronic disbursements at the direction of clients. Third, while the prior rule did not explicitly prohibit lawyers from deducting charges for electronic transfers from disbursements to clients, the new rule explicitly permits lawyers to deduct charges provided the client has agreed in writing. Thus, the new rule would permit a lawyer to receive a settlement payment into the E-Banking Trust Account by electronic transfer, transfer the portion of the settlement that represents earned fees to the lawyer’s business account by electronic transfer, and electronically transfer the client’s portion to the client’s bank account while deducting any fees or surcharges, if the client has agreed in writing. All such transfers, however, cannot occur until the funds are available (see SCR 20:1.15 (f)(4)). This would not have been possible under the old rule.
It is also worth noting that lawyers remain responsible for maintaining complete records of each transaction, including electronic transactions, although as discussed below, the new rule does not mandate what particular format those records should take. Lawyers should be aware of the requirement that information about the date, amount, payee, client matter, and reason for the electronic disbursement be recorded in the financial institution’s electronic payment system. See SCR 20:1.15(f)(3)b.5.
The new rule does not directly address the question of whether, when a lawyer accepts fee and cost payments from clients by credit card or other forms of electronic payment, the lawyer or the client should be responsible for the credit card issuer’s fees or other fees imposed by a service provider. Such fees are normally borne by sellers. The comment to this rule, however, does provide guidance:
“Financial institutions, as credit card issuers, routinely impose charges on vendors when a customer pays for goods or services with a credit card. That charge is deducted directly from the customer’s payment. Vendors who accept credit cards routinely credit the customer with the full amount of the payment and absorb the charges. Before holding a client responsible for these charges, a lawyer needs to disclose this practice to the client in advance, and assure that the client understands and consents to the charges. In addition, the lawyer needs to investigate the following concerns before accepting payments by credit card:
1. Does the credit card issuer prohibit a lawyer/vendor from requiring the customer to pay the charge? If a lawyer intends to credit the client for anything less than the full amount of the credit card payment, the lawyer needs to assure that this practice is not prohibited by the credit card issuer’s regulations and/or by the agreement between the lawyer and the credit card issuer. Entering into an agreement with a credit card issuer with the intent to violate this type of requirement may constitute conduct involving dishonesty, fraud, or deceit, in violation of SCR 20:8.4(c).
2. Does the credit card issuer require services to be rendered before a credit card payment for legal fees is accepted? If a lawyer intends to accept fee advances by credit card, the lawyer needs to ensure that fee advances are not prohibited by the credit card issuer’s regulations and/or by the agreement between the lawyer and the credit card issuer. Entering into an agreement with a credit card issuer with the intent to violate this type of requirement may constitute conduct involving dishonesty, fraud, or deceit, in violation of SCR 20:8.4(c).
3. By requiring clients to pay the credit card charges, is the lawyer required to make certain specific disclosures to such clients and offer cash discounts to all clients? If a lawyer intends to require clients to pay credit card charges, the lawyer needs to ensure that the lawyer complies with all state and federal laws relating to such transactions, including, but not limited to, Regulation Z of the Truth in Lending Act, 12 C.F.R. § 206.”
Discussion of federal regulations and requirements of credit card companies is beyond the scope of this article, but lawyers who wish to use this alternative must resolve these questions. Regardless of the arrangement with the client, the lawyer still must transfer the appropriate amount to the appropriate account within three business days after such funds become available.
The new rule now permits lawyers to make electronic deposits to and disbursements from a primary trust account provided certain conditions are met. In what perhaps is the most significant change, the new rule now permits lawyers to conduct electronic transactions directly to and from the lawyer’s only trust account, if the lawyer maintains commercially reasonable security measures, purchases a crime bond or insurance policy for the account, and arranges for any chargebacks to come from the lawyer’s business account or replaces any funds withdrawn by a financial institution or card issuer before making disbursements from the trust account again. SCR 20:1.15(f)(3) now reads:
“c. Alternative to E-Banking Trust Account. A lawyer may deposit funds paid by credit card, debit card, prepaid or other types of payment cards, and other electronic deposits into a trust account, and may disburse funds from that trust account by electronic transactions that are not prohibited by sub. (f)(2)c., without establishing a separate E-Banking Trust Account, provided that all of the following conditions are met:
1. The lawyer or law firm maintains commercially reasonable account security for electronic transactions.
2. The lawyer or law firm maintains a bond or crime policy in an amount sufficient to cover the maximum daily account balance during the prior calendar year.
3. The lawyer or law firm arranges for all chargebacks, ACH reversals, monthly account fees, and fees deducted from deposits to be deducted from the lawyer’s or law firm’s business account; or the lawyer or law firm replaces any and all funds that have been withdrawn from the trust account by the financial institution or card issuer within 3 business days of receiving actual notice that a chargeback, surcharge, or ACH reversal has been made against the trust account; and the lawyer or law firm reimburses the account for any shortfall or negative balance caused by a chargeback, surcharge, or ACH reversal. The lawyer shall reimburse the trust account for any chargeback, surcharge, or ACH reversal prior to disbursing funds from the trust account.”
This new provision thus allows lawyers to conduct electronic transactions with only one trust account and one business account, which was previously not possible. Thus, to continue with the example used above, a lawyer using this alternative could accept an electronic payment of settlement funds from a third party into the lawyer’s only trust account, and when those funds are available, make an electronic disbursement to the client and another electronic disbursement of earned fees to the lawyer’s operating account. This is possible when the lawyer institutes certain procedures.
The lawyer must maintain commercially reasonable security measures for electronic transactions. Neither the rule nor its comment define what is meant by “commercially reasonable account security” but OLR Trust Account Program Administrator Mary Smith states:
Lawyers will need to communicate with their financial institution as to what is “commercially reasonable” based on the specific types of e-banking that a lawyer plans to utilize. It is very likely that security measures will evolve over time in response to the evolution of cyber threats and that minimum security requirements for the lawyer or law firm to follow will be identified in an agreement with the financial institution. At this time, commercially reasonable security measures may include some or all of the following:
1) A dedicated computer for e-banking that is not connected to the firm’s server that has software protection against malware, spyware, and viruses;
2) Education of lawyers and law firm staff on corporate account takeover, social engineering techniques, and other cyber threats;
3) ACH Debit blocks;
4) ACH Positive pay;
5) Online review of account activity at least daily;
6) Security Tokens for two-factor authentication (tokens are small hardware devices with a PIN number and a time sensitive code to conduct transactions);
7) Dual controls (two people must authorize a transfer); and
8) Creation of a contingency plan to mitigate and/or recover unauthorized transfers in the event of a cyberattack or corporate account takeover.
Thus, there is no hard and fast definition, and the examples listed above may or may not be appropriate for any given firm, but the security of transactions, particularly electronic transactions, is a point of emphasis in the new rule. Lawyers who wish to use this option will need to be able to demonstrate that thought was given to the electronic security of the account and necessary measures were employed. Many law firms will have already considered this issue and thus will have commercially reasonable security measures in place. For lawyers who believe they need to consider the issue further, the first step may be contacting the financial institution where the account is kept and seeking guidance as to what may be appropriate for the lawyer’s specific situation. Lawyers may also wish to consult Wisconsin Ethics Opinion EF-15-01 with respect to security of electronic information, and look for further information on this topic from the State Bar and the OLR in the future.
The lawyer must maintain a bond or policy for the maximum daily amount from the prior year. Lawyers seeking to purchase the necessary crime bond or policy may wish to consult first with their malpractice carriers or standard commercial insurance carriers.
The lawyer must make arrangements with the bank for any chargebacks or reversals to come from the lawyer’s operating rather than trust account. Lawyers obviously will need to discuss such arrangements directly with their banks, but as an alternative, lawyers may simply replace such funds before making any disbursements from the trust account.
The new rule contains no specific record-keeping requirements for trust accounts. In another very significant change, lawyers are no longer mandated to keep trust account records in any specific form. Lawyers, of course, still have the duty to keep complete and accurate records for all trust accounts, but the specific record-keeping requirements contained in the former SCR 20:1.15(f), such as individual client ledgers, monthly reconciliations, and so on, are now replaced with the new SCR 20:1.15(g), which states:
“(1) Record retention. A lawyer shall maintain and preserve complete records of trust account funds, all deposits and disbursements, and other trust property and shall preserve those records for at least 6 years after the date of termination of the representation. Electronic records shall be backed up by an appropriate storage device. The office of lawyer regulation shall publish guidelines for trust account record-keeping.
(2) Record production. All trust account records have public aspects related to a lawyer’s fitness to practice. Upon request of the office of lawyer regulation, or upon direction of the supreme court, the records shall be submitted to the office of lawyer regulation for its inspection, audit, use, and evidence under any conditions to protect the privilege of clients that the court may provide. The records, or an audit of the records, shall be produced at any disciplinary proceeding involving the lawyer, whenever material.
(3) Standard of proof. A lawyer’s failure to promptly deliver trust property to a client or 3rd party entitled to that trust property, promptly submit trust account records to the office of lawyer regulation, or promptly provide an accounting of trust property to the office of lawyer regulation shall result in a presumption that the lawyer has failed to hold trust property in trust, contrary to SCR 20:1.15(b)(1). This presumption may be rebutted by the lawyer’s production of records or an accounting that overcomes this presumption by clear, satisfactory, and convincing evidence.”
Lawyers must maintain complete records for six years and must produce these complete records upon request of the OLR, but the specific form these records take is up to the lawyer. The OLR publishes record-keeping guidelines (available at www.wicourts.gov/courts/offices/olr.htm ) and many lawyers will choose to follow these guidelines, but failure to do so is no longer a violation of a disciplinary rule. One practical consequence of this is that lawyers will no longer have to avoid certain record-keeping software solely because it does not meet all of the record-keeping requirements of the trust account rule.
That said, adherence to the guidelines published by the OLR will ensure that a lawyer’s records are complete and accurate. Furthermore, with respect to reconciliations, the OLR points out that reconciliations performed with software programs will need to be printed at the time of the reconciliation in order to preserve a record of the ownership of all funds in trust. Software programs are typically unable to identify ownership of funds in trust on past dates, and reconstructing this information can be difficult and time consuming. Lawyers are required to account for the ownership of trust funds; and when unable to provide records or an accounting to the OLR, the lawyer may be presumed to have failed to hold funds in trust, in violation of SCR 20:1.15(b)(1) or (k)(1). (See SCR 22.39 Burden of Proof and SCR 20:1.15(e)(4), (g)(3) and (k)(9).)
Note that in return for the absence of specific requirements, lawyers who fail to promptly deliver trust property or provide an accounting will be presumed to have failed to hold property in trust in disciplinary proceedings. With respect to this presumption, the newly created SCR 22.39 reads:
“(2) A lawyer’s failure to promptly deliver trust property to a client or 3rd party entitled to the property, or promptly submit trust or fiduciary account records to the office of lawyer regulation, or promptly provide an accounting of trust or fiduciary property to the office of lawyer regulation, shall result in a presumption that the lawyer has failed to hold trust or fiduciary property in trust, contrary to SCR 20:1.15(b)(1) or SCR 20:1.15(k)(1). This presumption may be rebutted by the lawyer’s production of records or an accounting that overcomes this presumption by clear, satisfactory, and convincing evidence.”
Normally, the OLR has the burden to prove misconduct by clear, satisfactory, and convincing evidence. This is now changed under the new rule.
Other provisions. There are other provisions in the new trust account rule, such as an expanded discussion of IOLTA requirements (SCR 20:1.15(d)), an amended section on trust account certifications (20:1.15(i)), and an amended section on fiduciary property (SCR 20:1.15(k)). Time and space restrictions do not allow for a detailed discussion of all the changes in this article, and lawyers are strongly encouraged to carefully read the entire rule.
The new trust account rule contains significant changes from the current rules. While the article highlights what the author views as the most significant changes, this article is not a comprehensive discussion of all the changes to the rule. Lawyers are urged to read the new rule in its entirety.