BILL ANALYSIS
AB 940
Page 1
Date of Hearing: May 5, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 940 (Committee on Judiciary) - As Amended: April 13, 2009
SUBJECT : ATTORNEYS: IOLTA ACCOUNTS
KEY ISSUE : TO ASSIST ATTORNEYS AND FINANCIAL INSTITUTIONS IN
COMPLYING WITH EXISTING LAW, SHOULD THE CALIFORNIA IOLTA STATUTE
BE AMENDED TO CODIFY A LONGSTANDING SUPREME COURT RULE AS WELL
AS THE EXISTING RESPONSIBILITY OF ATTORNEYS TO REPORT COMPLIANCE
TO THE STATE BAR?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill simply seeks to codify a California Supreme Court Rule
that has long allowed financial institutions other than banks to
hold IOLTA accounts, and to codify the existing responsibility
of attorneys to report compliance with laws regulating IOLTA
accounts to the State Bar. The State Bar sponsors this bill to
rectify an unintended discrepancy in the law resulting from
passage of last session's AB 1723, and also to respond to the
State Auditor's request that the Bar takes steps to confirm
whether attorneys are complying with existing IOLTA
requirements. In both cases, the State Bar reports, these
issues were circulated last year for public comment and received
no objections.
SUMMARY : Seeks to codify a California Supreme Court Rule that
has long allowed financial institutions other than banks to hold
IOLTA accounts, as well as to codify the existing responsibility
of attorneys to report compliance with laws regulating IOLTA
accounts. Specifically, this bill :
1)Defines "eligible institution" to mean either of the
following:
a) A bank, savings and loan, or other financial institution
regulated by a federal or state agency that pays interest
or dividends in the IOLTA account and carries deposit
insurance from an agency of the federal government.
AB 940
Page 2
b) Any other type of financial institution authorized by
the Supreme Court.
2)Provides that an attorney or law firm that establishes an
IOLTA account shall report IOLTA account compliance and all
other IOLTA account information required by the State Bar in
the manner specified by the State Bar.
EXISTING LAW, the State Bar Act:
1)Requires an attorney or law firm that receives or disburses
trust funds to establish an interest bearing demand trust
account ("IOLTA account") and to deposit in the account all
client deposits that are nominal in amount or are on deposit
or invested for a short period of time. (Business &
Professions Code Section 6211(a).)
2)Defines "IOLTA account" to mean (1) an interest-bearing
checking account, (2) an investment sweep product that is a
daily (overnight) financial institution repurchase agreement
or an open-end money-market fund, or (3) any other investment
product authorized by California Supreme Court rule or order
and established and maintained pursuant to Section 6211(a).
a) Requires a daily financial institution repurchase
agreement to be fully collateralized by U.S. Government
Securities or other comparably conservative debt securities
and to be established only with an eligible institution
that is "well-capitalized" or "adequately capitalized" as
those terms are defined by applicable federal statutes and
regulations.
b) Requires that an open-end money-market fund: (1) must be
invested solely in U.S. Government Securities or repurchase
agreements fully collateralized by U.S. Government
Securities; (2) must hold itself out as a "money-market
fund" as that term is defined by federal statutes and
regulations under the Investment Company Act of 1940; and
(3) must have, at the time of the investment, total assets
of at least $250,000,000. (Business & Professions Code
Section 6213(j).)
3)Defines "eligible institution" to mean a bank or any other
financial institution authorized by the Supreme Court to hold
AB 940
Page 3
an IOLTA account. (Business & Professions Code Section
6213(k).)
4)In addition, Title 2 of the Rules of the State Bar of
California (the "Rules") concerns the rights and
responsibilities of its member attorneys and in many cases the
Rules implement California statutes and court rules. Division
5 of Title 2 (Rules 2.100 to 2.1.31) deals specifically with
trust accounts and the requirements that attorneys must follow
to comply with these Rules. Under Rule 2.114, a member must
report compliance with IOLTA account rules to the State Bar.
COMMENTS : This bill seeks to codify a California Supreme Court
Rule that has long allowed financial institutions other than
banks to hold IOLTA accounts, and seeks to codify the existing
responsibility of attorneys to report to the State Bar regarding
compliance with laws regulating IOLTA accounts. The State Bar
sponsors this bill simply to rectify an unintended discrepancy
in the law resulting from passage of AB 1723.
Background : In 2007, the Legislature passed and the Governor
signed AB 1723, which required that attorneys hold IOLTA
accounts at financial institutions, defined by the bill as "a
bank or any other institution authorized by the Supreme Court",
that offer rates comparable to rates paid to other depositors.
The bill also expanded the range of secure investment vehicles
in which IOLTA accounts may be held. At the time the bill's
definition became law, a 1981 Supreme Court order was in place
which defined eligible financial institutions to include
entities besides banks, and also required deposits to be FDIC
insured.
In November 2007, the State Bar petitioned the Supreme Court to
rescind this order because the insurance requirement was
incompatible with the new types of investment vehicles approved
by the statute. In January 2008, the Supreme Court approved the
petition with respect to rescission of the 1981 order, thereby
removing the inconsistent FDIC insurance requirements, but the
Court declined to adopt a new interim order that would have
continued the broader definition of financial institutions that
had been in place since the IOLTA statutes were originally
passed in 1979, intimating that the definition should be
accomplished by statute.
Unfortunately, without an order from the Court, banks are the
AB 940
Page 4
only type of financial institution authorized by the IOLTA
statutes to hold trust fund accounts. However, 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.
Technical Need to Clarify the Definition of "Eligible
Institution ." As currently drafted, the definition of "eligible
institution" in Business & Professions Code Section 6213(k) is
both too narrow and too broad - too narrow in that it does not
explicitly authorize any financial institution except banks
(which does not include all of the financial institutions that
previously held and currently hold IOLTA accounts), and too
broad in that it does not include the key safety requirement
that the financial institutions carry federal deposit insurance.
Therefore, in the interest of sound drafting and to effectuate
the legislative intent of AB 1723, this bill is needed to
clarify that the definition of "eligible institution" shall
encompass those institutions that have always been eligible to
hold IOLTA accounts (i.e., banks, saving banks, savings and loan
associations, and credit unions) and to include the requirement
that an eligible institution carry deposit insurance.
The State Bar reports that when this proposed definition
(embodied in the form of a Proposed Supreme Court Rule) was
widely circulated in December 2008 for public comment, including
circulation among banks and financial institutions, it received
no objections. The record of public comments indicates it was
supported by many legal aid organizations, including the Legal
Aid Association of California (LAAC).
Compliance Reporting by Attorneys. Under State Bar Rule 2.114,
a member must report compliance with IOLTA account rules to the
State Bar. This bill merely seeks to codify the existing
responsibility of attorneys and law firms to report IOLTA
account compliance and all other required account information to
the State Bar in the manner specified under Division 5 of Title
2 of the Rules of the State Bar of California.
The State Bar proposes this simple codification in partial
response to the State Auditor's request that the Bar takes steps
to confirm whether attorneys are complying with existing IOLTA
requirements. This bill will help the State Bar in its efforts
AB 940
Page 5
to ensure that all of its members covered by this Rule are
indeed complying with it. The State Bar reports that when this
particular issue was circulated last year for public comment as
part of a Proposed Supreme Court Rule, it received no
objections.
REGISTERED SUPPORT / OPPOSITION :
Support
State Bar of California (sponsor)
Opposition
None on file
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334