FDIC Announces IOLTA Changes
By Gina Hendryx, OBA Ethics Counsel
The recent economic woes coupled with the instability of some banking institutions have caused much concern about the security of client funds held by lawyers in their pooled interest-bearing trust accounts commonly referred to as IOLTA (Interest On Lawyer’s Trust Account) accounts. Effective Nov. 21, 2008, the FDIC extended the Temporary Liquidity Guarantee Program (TLGP) to client funds deposited in IOLTA accounts. All funds in an IOLTA account, regardless of size, will now be insured in full by the FDIC and backed by the full faith and credit of the U.S. government as part of the TLGP program through Dec. 31, 2009, provided the banking institution has opted to participate. The majority of Oklahoma banks are participating in the TLGP, however there are some banks primarily in the rural areas of the state that have chosen to opt out of the TLGP. The following link is to the FDIC site listing those banks that have opted out of the TLGP: www.fdic.gov/regulations/resources/TLGP/tagp.xls. The site notes that this list is in the process of being refined and should not be considered final. If you have any questions or concerns regarding the institution where you have your IOLTA account, you should contact the bank directly.
The American Bar Association, state IOLTA programs, and community and consumer groups organized a nationwide effort to persuade the FDIC to include IOLTA funds in this expanded insurance program. In a letter to the FDIC, representative of 50 IOLTA programs throughout the country called for extension of the insurance coverage to IOLTA accounts noting that IOLTA programs provided more than $212 million in 2007 for the provision of civil legal services to the poor.
The Oklahoma Rules of Professional Conduct require lawyers and law firms to hold client or third-party funds in a trust account at an FDIC insured bank or savings and loan association. Funds that are nominal in amount or to be held for a short period of time are to be placed in a pooled interest-bearing account (IOLTA) with the interest paid to the Oklahoma Bar Foundation. Client or third-party funds that are not “nominal in amount” or will not be held “for a short period of time” may be deposited in a separate interest-bearing individual trust account with the interest paid to the client or third party. The TLGP program has only been extended to IOLTA accounts and does not apply to individual lawyer/client trust accounts.
The FDIC treats the deposits in an IOLTA account as the accounts of the individual clients provided certain requirements are met. Therefore, funds in an IOLTA account are insured as funds of the actual owner to the same extent as if deposited by the actual owner rather than the lawyer or law firm. However, as noted above, the TLGP now provides unlimited insurance coverage for IOLTA accounts at least through Dec. 31, 2009.
The requirements that must be met for the FDIC to treat deposits in lawyer pooled trust accounts as funds of the individual client include:
- The fiduciary name of the account must be disclosed in the account title.
- For example, John Smith Client Trust Account
- The account must contain the tax identification number of the Oklahoma Bar Foundation for IOLTA accounts.
- The identities and interests of the clients must be ascertainable from records maintained in the regular course of business by the depositor. Therefore, the lawyer or law firm must have documentation and records reflecting all transactions of the account attributable to each client or third party.
SEPARATE INTEREST-BEARING ACCOUNTS
As stated above, the lawyer or law firm may establish a separate trust account on behalf of a client or third party whose funds are not nominal in amount or are going to be on deposit for an extended period of time. These accounts should reflect the party for whom the money is held. For example, John Smith Client Trust Account for the Benefit of Joe Jones. This account may earn interest and the interest must be paid to the client or third party. Such accounts are often employed for large retainers, settlement funds that will be on deposit for a lengthy period of time and sale proceeds that are awaiting a determination of ownership. These separate interest-bearing trust accounts are limited to the $250,000 FDIC insurance coverage. These accounts must also satisfy the FDIC requirements for being treated as a fiduciary account including the name requirements, using the client’s tax ID or Social Security number on the account and maintaining adequate records of transactions. Because of the $250,000 per depositor insurance coverage limit, lawyers should discuss the possibility that the client may already have money on deposit with the institution and make sure that the client’s insurance coverage is not capped at $250,000, leaving other funds uninsured. If a client’s funds in the non-IOLTA lawyer trust account exceeds $250,000, the lawyer or law firm should consider dividing the funds into interest bearing accounts at different institutions and/or investigate banking options such as the CDARS program for protecting deposits in excess of $250,000.
For more information on the TLGP program, visit www.fdic.gov/regulations/resources/TLGP/index.html and www.fdic.gov/deposit/deposits/changes.html.
Have an ethics question? It’s a member benefit, and all inquiries are confidential. Contact Ms. Hendryx at email@example.com or (405) 416-7083; (800) 522-8065.
Originally published in the Oklahoma Bar Journal
-- Dec.13, 2008 -- Vol. 79; No. 33.