BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 940
Committee on Judiciary
As Amended April 13, 2009
Hearing Date: June 9, 2009
Business and Professions Code
SK:jd
SUBJECT
Attorneys: Interest on Lawyer Trust Accounts (IOLTA)
DESCRIPTION
This bill, sponsored by the State Bar of California, would
specify that a financial institution other than a bank may hold
an IOLTA account and would require that financial institutions
holding IOLTA accounts carry deposit insurance. This bill would
also require attorneys to report to the State Bar their
compliance with laws regulating IOLTA accounts.
BACKGROUND
Under existing law, an attorney or law firm must deposit all
client deposits or funds that are nominal in amount or are on
deposit or invested for a short period of time into an IOLTA
account. These funds may be deposited or invested in a single
unsegregated account, and the interest and dividends earned is
required to be paid to the State Bar to be used for programs
that provide civil legal services to indigent persons.
In 2007, the Legislature passed and the governor signed AB 1723
(Judiciary, Ch. 422, Stats. 2007), sponsored by the State Bar to
modernize statutes related to IOLTA accounts. AB 1723 expanded
the types of accounts in which IOLTA funds may be deposited and
required banks to offer the same interest rates on IOLTA
accounts that they offer on other comparable accounts.
At the time AB 1723 was enacted, a 1981 California Supreme Court
order was in place which defined eligible financial institutions
to include entities besides banks and also required deposits to
be insured by an agency of the federal government. In November
(more)
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2007, the State Bar petitioned the California Supreme Court to
rescind this order because the insurance requirement was
incompatible with the new types of investment vehicles allowed
under the statute. More specifically, the Bar's background
materials state "[t]he rescission of the interim order was
necessary because cash management accounts that permit overnight
investment are not generally covered by federal insurance during
the period they are invested in or secured by U.S. Government
securities and therefore the order's language requiring deposits
to be insured could not apply to the new types of investments."
In January 2008, the court approved the Bar's petition regarding
the rescission of the 1981 order, thereby removing the deposit
insurance requirements. The court did not, however, adopt a new
interim order defining eligible financial institutions.
As a result, without an order from the court, banks are the only
type of financial institution authorized to hold trust fund
accounts under the IOLTA statutes. In order to correct this
discrepancy, this bill would specify that a bank, savings and
loan, or other financial institution may hold an IOLTA account
under the IOLTA statutes.
CHANGES TO EXISTING LAW
1. Existing law requires an attorney or law firm that receives
or disburses trust funds to establish and maintain an IOLTA
account in which the attorney or firm must deposit or invest
all client deposits or funds that are nominal in amount or are
on deposit or invested for a short period of time. All such
funds may be deposited or invested in a single unsegregated
account and the interest and dividends earned on those
accounts must be paid to the State Bar to be used for programs
that provide civil legal services to indigent persons. (Bus.
& Prof. Code Sec. 6211(a).)
Existing law requires an attorney or law firm that establishes
an IOLTA account pursuant to Section 6211(a) to meet specified
requirements, including that the IOLTA account be established
and maintained with an "eligible institution" that must offer
an interest rate or dividends on the IOLTA account that is not
less than that generally paid to nonattorney customers on
similar accounts. (Bus. & Prof. Code Sec. 6212.)
Existing law defines "eligible institution" to mean a bank or
any other financial institution authorized by the Supreme
Court. (Bus. & Prof. Code Sec. 6213(k).)
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This bill would revise the definition of "eligible institution"
to instead provide that the term means either: (1) a bank,
savings and loan, or other financial institution regulated by
a state or federal agency that pays interest or dividends on
the IOLTA account and carries deposit insurance from an agency
of the federal government; or (2) any other type of financial
institution authorized by the Supreme Court.
2. Existing rules of the State Bar of California require
attorneys to report compliance with IOLTA account rules to the
State Bar. (State Bar of California Rule 2.114.)
This bill would require an attorney or law firm to report IOLTA
account compliance and all other IOLTA account information
required by the State Bar in the manner specified by the State
Bar.
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COMMENT
1. Stated need for the bill
As explained above, this bill is intended to respond to the
situation in which the California Supreme Court rescinded its
1981 order defining eligible financial institutions to include
entities in addition to banks and requiring deposits to be
federally insured. Because the court did not adopt a new
interim order defining eligible institutions, banks are the only
type of financial institutions authorized to hold trust fund
accounts. The author states, however, that "? other types of
financial institutions, such as savings and loans and credit
unions, have always held and currently do hold attorney trust
funds since the inception of the IOLTA statutes, and there is no
reason not to continue their clear authority to do so.
Therefore, in the interest of sound drafting and to effectuate
the legislative intent of AB 1723, AB 940 is needed to clarify
the definition of 'eligible institutions.'"
The sponsor of the bill, the State Bar of California, asserts
that the bill's expansion of the types of financial institutions
that may hold IOLTA accounts in addition to banks is consistent
with current practice.
2. Clarification of the term "eligible institutions" and
requirement to carry deposit insurance
By specifying that the term "eligible institutions" means a
bank, savings and loan, or other financial institution, this
bill is intended to clarify which institutions may hold an IOLTA
account under the IOLTA statutes. These specific entities were
included in the Supreme Court's initial 1981 order. In
addition, both the author and sponsor of the bill indicate that
the change proposed by this bill is consistent with current
practice.
With respect to the issue of deposit insurance, as explained
above, the rescission of the Supreme Court's 1981 order was
necessary in order to permit attorneys and law firms to take
advantage of the new types of investment vehicles allowed under
AB 1723. In particular, the deposit insurance requirement
prohibited the use of cash management accounts that permit
overnight investment. These types of accounts are not generally
covered by federal insurance during the period they are invested
in or secured by U.S. Government securities. Once the Supreme
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Court's order was rescinded, however, there was no requirement
that financial institutions holding IOLTA accounts carry federal
insurance. This bill would address that issue by requiring that
the eligible institution carry deposit insurance from an agency
of the federal government.
In addition, this proposed change was circulated for public
comment in December 2008 as a "Proposed Rule of Court and/or
Legislative Amendment to IOLTA Statute" and the State Bar
indicates that the written comments all supported the proposed
Rule. The proposed change was posted on the Bar's Web site and
circulated to the California Bankers Association, and many legal
aid organizations, such as Disability Rights California, Legal
Aid Association of California, and the Legal Aid Society of
Orange County, supported the proposed change.
3. Attorney compliance with IOLTA statutes
This bill's requirement that an attorney or law firm report to
the State Bar IOLTA account compliance and all other required
IOLTA account information is consistent with State Bar of
California Rule 2.114 which requires attorneys to report
compliance with IOLTA account rules. According to the Assembly
Judiciary Committee analysis, this provision is "in partial
response to the State Auditor's request that the Bar take steps
to confirm whether attorneys are complying with existing IOLTA
requirements."
The Bar further indicates that the reporting requirements
contained in the bill will help "ensure that the State Bar can
meet its obligations to ensure attorney compliance with IOLTA
statutory requirements." According to the Bar, this reporting
requirement was publicly circulated for comment and no adverse
comments were received.
Support : Legal Aid Association of California
Opposition : None Known
HISTORY
Source : State Bar of California
Related Pending Legislation : None Known
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Prior Legislation : AB 1723 (Judiciary, 2007) See Background.
Prior Vote :
Assembly Judiciary Committee (Ayes 10, Noes 0)
Assembly Floor (Ayes 73, Noes 0)
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