Part A – question (d)(3) – Investment of Trust Money
When Investment Money is not Trust Money
Section 129(2)(b) provides that the following money is not trust money:
- money entrusted to, or held by, a law practice for, or in connection with, a managed investment scheme or mortgage financing undertaken by the law practice.
- money received by a law practice for, or in connection with, a financial service it provides in circumstances where the law practice, or an associate of the law practice, is required to hold an Australian financial services licence covering the provision of the service, or provides the financial service as a representative of another person who carries on a financial services business.
- money received by a law practice for investment purposes.
‘Australian financial services licence’, ‘authorised representative’, ‘financial service’ and ‘financial services businesses’ are not defined in the Uniform law or the Uniform General Rules. The Board is of the view that these terms have the same meanings as in Chapter 7 of the Corporations Act 2001 (Cth).
Disclosure to Clients— When Investment Money is not Trust Money
When a law practice receives or holds money that is not trust money (other than money for the payment of legal costs due to the law practice), it must give the person who provided the money written notice (Section 134).
When Investment Money is Trust Money
Section 129(2)(d) provides that money that is received by a law practice for investment purposes is trust money if both of the following criteria are satisfied:
- the law practice received the money in the ordinary course of legal practice and primarily in connection with the provision of legal services at the direction of the client; and
- the investment is, or is to be, made in the ordinary course of legal practice and for the ancillary purpose of maintaining or enhancing the value of the money or property.
The designated regulatory authorities suggest that any law practice investing money that has been entrusted to the law practice should obtain a written direction from the person on whose behalf the money is held, unless acting under a power. The written direction provides evidence that the law practice is not making investment decisions on behalf of a person on whose behalf money is held which may be in breach of the Managed Investments Act 1998 (Cth) and/or the Corporations Act 2001 (Cth).
If a law practice was entrusted with settlement moneys from the proceeds of sale, the settlement monies are recognised as trust money. This trust money is then receipted through the trust records of the law practice (the general trust account or a controlled money account). If the law practice is subsequently given further instructions to invest the trust moneys in a non ADI, or to buy shares or other property on behalf of the client, this is still trust money.