Handling Client Funds
Trust Accounts: Custody Rules for Client Money
Deposit deadlines, reconciliation frequency, permitted balances of brokerage money in the account, retention periods for records and audit procedure are all set by statute or commission rule where you are licensed. Read your own license law for the numbers; this page covers the structure the rules are built on.
Money that passes through a brokerage on its way somewhere else is not brokerage money at any point. It is held, not owned. Regulators treat a failure of custody more severely than almost anything else a licensee can do, because the loss lands on a consumer who had no way to prevent it.
Expect this material throughout the broker exam and in smaller doses on the salesperson exam. The scored distinctions are narrow: which account, whose authority, what record, and how quickly.
Custody, Not Ownership
A trust account is a depository, held in a recognized institution, that exists to segregate money belonging to other people from money belonging to the firm. Earnest money handed over with an offer, security deposits collected under a lease, rent received on behalf of an owner and advance fees for services not yet rendered all land there.
Segregation is the whole point. The firm's revenue, its payroll, its rent and its commissions move through an operating account. Client money moves through the trust account. The two do not touch, and the line is not an accounting preference; it is the thing being enforced.
The relationship is fiduciary. Funds in the account remain the property of whoever deposited them or is entitled to receive them, and the broker's authority over the balance is limited to carrying out the instruction in the contract or the order of a court. Authority to hold is never authority to spend.
Responsibility attaches to the broker personally. In most jurisdictions only a broker may open and maintain the account, and the designated or managing broker answers for its condition whether or not the bookkeeping was delegated to staff. Delegating the task does not delegate the duty.
A licensee working under a broker has one job with client money: deliver it. Funds received are turned over to the employing broker within the period the state prescribes, without detour through a personal account and without holding onto an uncashed instrument as a favor to anyone.
Terms the Exam Expects You to Distinguish
These five come up constantly, and two pairs of them are routinely swapped in distractors.
Commingling
Letting money that belongs to clients sit together with money that belongs to the firm or to the broker individually. The offense is the loss of separation itself. It is chargeable whether the cause was a deliberate shortcut or a careless deposit, and whether or not anyone was ultimately short a dollar.
Conversion
Applying money held for someone else to a purpose of the broker's own. Paying an office bill out of the balance is the textbook case. This is a step past mixing funds, because the money is gone rather than merely misplaced, and it exposes the licensee to revocation and to prosecution.
Reconciliation
The periodic exercise of proving three figures agree: the balance the bank reports, the balance the broker's own journal shows, and the sum of every individual client record. A discrepancy is treated as a shortage until it is explained, and most states require the comparison on a fixed cycle and in writing.
Ledger
The per-beneficiary record tracking what came in for one transaction or one tenancy, what went out, and what remains. Without it the pooled balance is just a number. With it, the firm can show at any moment whose money makes up the total, which is precisely what an auditor asks.
Disbursement
Releasing funds out of the account to the party entitled to them, whether that is the closing settlement, a buyer whose contingency failed, or an owner after a tenancy ends. Every release has to rest on an identifiable authority: a term of the contract, a written instruction signed by the parties, or a court directive.
Conduct That Produces Discipline
Enforcement files repeat themselves. These are the patterns that show up in them.
Depositing an earnest money check into the operating account, even briefly, and moving it across the next day.
Holding an instrument undeposited past the statutory deadline because a party asked for time.
Covering an overdraft in the firm's own account from the pooled client balance and intending to replace it.
Releasing contested earnest money to whichever party argued hardest, without written agreement from both or an order.
Running the account with no individual records, so the total cannot be attributed to anyone in particular.
Skipping reconciliations, or performing them without documenting the result and the explanation for any variance.
Taking a commission out of the balance before closing, on the theory that it is already earned.
Treating interest credited to the account as brokerage income where the state has directed it elsewhere.
Questions Candidates Ask About This Topic
Both parties claim the deposit. What may the broker do?
Nothing unilateral. Holding continues until the buyer and seller sign an instruction agreeing on the split, or a court decides. The usual mechanism for getting out from between them is to deposit the disputed sum with the court and let the claimants litigate, and some states additionally allow the broker to seek the commission's guidance. Picking a side is how brokers lose licenses on an otherwise ordinary failed contract.
May a salesperson open a trust account?
No. The authority runs to the broker holding the firm's license. A salesperson who receives funds is a conduit and must pass them to the supervising broker promptly. Opening a personal account to park a client's check is a violation on its own, independent of whether the money was later paid out correctly.
Can the broker keep interest the balance earns?
Generally not for the broker's own benefit. Where interest is permitted, the state directs it either to the party whose money produced it or to a designated public fund, commonly one supporting housing or consumer programs. Whether the account may be interest-bearing at all, and who receives the earnings, is answered in your license law rather than by general principle.
Is any brokerage money allowed in the account?
Many jurisdictions permit a small, documented amount of the broker's own funds to sit in the account to absorb service charges or maintain a minimum balance the bank requires. The allowance is narrow and capped, and exceeding it converts a permitted cushion into commingling. Confirm your state's limit rather than assuming a figure.
What does an audit actually examine?
Whether the three-way reconciliation ties out, whether each disbursement has authority behind it, whether deposits were made within the required time, and whether the individual records add up to the bank balance. Investigators are not looking for elegance. They are looking for a balance that can be attributed, dollar by dollar, to a named beneficiary.
Why does the broker exam weight this so heavily?
Because passing it is a precondition to supervising other people's transactions. A broker candidate is being tested on responsibility for a system, not just on knowing a definition, which is why items tend to describe an office situation and ask what the broker is obliged to do about it.
Working the Topic Before Exam Day
Fix the two-account picture first and keep it fixed: money the firm earned on one side, money the firm merely holds on the other. Then attach each vocabulary term to a direction of travel. Commingling is a boundary failure. Conversion is money leaving for the wrong reason. Reconciliation and the ledger are the proofs that neither happened.
Next, practice the authority question. For any described disbursement, name the document that permits it. If you cannot name one, the correct answer is that the funds stay put. That single habit answers a large share of scenario items on this material.
Finally, get the numbers from your own state rather than from a national summary, because deposit windows, reconciliation cycles and retention periods are where jurisdictions diverge most. RE License Prep keeps separate state banks for all 50 states and DC, on both the salesperson and broker tracks. Start with the free diagnostic, let your PassMap™ sequence the work and watch your PassPulse Score. One state costs $79, once, with immediate access after checkout and a 30-day money-back guarantee.