4.1 South Dakota Trust Account Requirements

Trust Account Basics

A trust account (also called an earnest money account) is a separate bank account a broker uses to hold money that belongs to clients and customers, not to the brokerage. In South Dakota the rules live in South Dakota Codified Law (SDCL) chapter 36-21A and in Administrative Rules of South Dakota (ARSD) article 20:69:14.

Is a Trust Account Required?

Unlike most states, South Dakota does not require a broker to maintain a trust account. A broker may instruct that earnest money be held by a title company, a closing attorney, or another neutral party. But the instant a broker chooses to hold the funds, every statutory safeguard applies.

Key distinction: "Optional account" does not mean "optional rules." If you touch client money, you are fully bound by SDCL 36-21A and the reconciliation duty in 36-21A-80.

Titling and Setup

If the broker opens an account, it must be a checking account clearly identified as holding other people's money.

Mandatory Notice to SDREC

When a broker establishes an account, the broker must inform the South Dakota Real Estate Commission (SDREC) staff of three data points, and report any later change in writing:

• Name of the financial institution
• Title of the account
• Account number

Exam trap: The duty is not satisfied by a phone call when something changes. A change to the bank, title, or number must be reported to SDREC in writing.

Deposit Timing and Handling

The single most-tested deposit rule is the deadline. Earnest money must be deposited on the first legal banking day after acceptance of the purchase agreement, unless the parties agree in writing to a different time (for example, "deposit within 3 business days" or "deposit upon removal of the inspection contingency").

Worked example. A buyer's offer is accepted at 7 p.m. Friday. Saturday and Sunday are not legal banking days, and the following Monday is a federal holiday. The "first legal banking day after acceptance" is therefore Tuesday, so depositing the check Tuesday morning is timely. Holding it in a desk drawer until the next Friday is a failure-to-deposit violation.

Client funds may go only into the trust account. They may never be parked in:

• a broker associate's personal account,
• the brokerage operating account, or
• any account that mixes brokerage money with client money.

Critical rule: Responsibility for the account rests with the responsible broker, even when a licensed associate physically handles the check. The broker cannot delegate away the legal duty.

Prohibited Practices: Commingling and Conversion

Two violations dominate exam questions and disciplinary files: commingling and conversion. Know the difference precisely.

Commingling

Commingling is mixing client funds with the broker's own personal or business funds. It is prohibited even if no money is lost, because the mixing itself destroys the separation the law requires.

Broker Funds for Bank Charges

The one narrow exception: a broker may deposit and keep only enough personal money to cover bank-assessed service charges and account maintenance fees. These funds must be entered on the ledger (often labeled "broker funds" or "broker equity") so they are never confused with client money.

Conversion

Conversion is the unauthorized use of client funds for any purpose, such as borrowing earnest money to make payroll. Conversion is more serious than commingling and can lead to revocation, restitution, and criminal prosecution. A shortage in the account is treated as evidence of conversion.

Exam tip: Commingling = the funds are mixed. Conversion = the funds are taken or used. Every conversion involves a shortage; not every commingling does.

Records and the Monthly Three-Way Reconciliation

Required Records

A South Dakota broker must keep a complete paper trail for every dollar held.

The Three-Way Reconciliation

At least monthly, the broker must reconcile three balances so they all agree:

1. The bank statement balance,
2. The total of all individual client (trust) ledgers, and
3. The check register balance.

When all three match (after adjusting for outstanding items), every client's money is accounted for. SDREC even publishes a trust account reconciliation form to standardize the process. Failing to reconcile at least monthly is itself a violation of SDCL 36-21A-80 — no theft is required for the violation to exist.

Worked example: The bank statement reads $24,500, but the client ledgers total $25,000. The $500 shortage means client money is missing — a red flag for conversion that must be investigated and cured immediately, not carried forward.

Co-Brokerage, Escrow, and Common Violations

Who Holds the Money in a Cooperative Deal

When two brokerages cooperate on one sale, the earnest money is held in one broker's trust account, not split between two. The contract and the parties' written instructions name which broker holds it.

Special Escrow (e.g., Timeshares)

Some transactions carry a statutory cancellation window. A common example is a timeshare interest, where the purchaser has a rescission period during which funds may not be disbursed.

Most Common Trust Account Violations

Improper trust account handling is one of the most frequent grounds for discipline in South Dakota.

Prevention tip: Written procedures, monthly reconciliation, separate accounts, and staff training stop almost every trust account violation before it starts. Most violations trace back to not understanding the account's purpose.