BILL ANALYSIS
AB 940
Page 1
ASSEMBLY THIRD READING
AB 940 (Judiciary Committee)
As Amended April 13, 2009
Majority vote
JUDICIARY 10-0
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|Ayes:|Feuer, Tran, Brownley, | | |
| |Skinner, Jones, Knight, | | |
| |Krekorian, Lieu, Monning, | | |
| |Nielsen | | |
|-----+--------------------------+-----+--------------------------|
| | | | |
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SUMMARY : Seeks to codify a California Supreme Court Rule that
has long allowed financial institutions other than banks to hold
interest bearing demand trust accounts (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.
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 pursuant to the State Bar Act:
1)Requires an attorney or law firm that receives or disburses
trust funds to establish an 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.
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2)Defines "IOLTA account" to mean: a) an interest-bearing
checking account; b) an investment sweep product that is a
daily (overnight) financial institution repurchase agreement
or an open-end money-market fund; or, c) any other investment
product authorized by California Supreme Court rule or order
and established and maintained pursuant to Business &
Professions Code Section 6211(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.
Requires that an open-end money-market fund: a) must be
invested solely in U.S. Government Securities or repurchase
agreements fully collateralized by U.S. Government Securities;
b) 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, c) must have, at the time
of the investment, total assets of at least $250 million.
3)Defines "eligible institution" to mean a bank or any other
financial institution authorized by the Supreme Court to hold
an IOLTA account.
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.
FISCAL EFFECT : None
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
AB 940
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sponsors this bill simply to rectify an unintended discrepancy
in the law resulting from passage of AB 1723 (Judiciary
Committee), Chapter 422, Statutes of 2007.
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
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.
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.
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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.
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 take steps
to confirm whether attorneys are complying with existing IOLTA
requirements. This bill will help the State Bar in its efforts
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.
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334
FN: 0000542