Bank Failure & IOLTA-What are a Lawyer’s Responsibilities?

In recent days, you may have seen news of the failure of Silicon Valley Bank, Santa Clara, CA, and Signature Bank, New York, NY. Although neither of these banks was approved to hold Arkansas IOLTA funds, at least one did maintain deposits in IOLTA accounts in other jurisdictions. Bank failures like this are exceptionally rare in the U.S. However, it’s a good time for attorneys to review best practices for IOLTA accounts.

Arkansas Rule of Professional Conduct 1.15, Comment 1 informs lawyers that they “should hold property of others with the care required of a professional fiduciary.” Among the many duties arising from the lawyer’s role as a professional fiduciary is taking reasonable steps to ensure that client and third-party funds held by the lawyer are fully insured in the event of bank failure. Below are recommendations from the Arkansas Access to Justice Foundation to help lawyers fulfill this obligation.

Establish An IOLTA Account to Hold Client & Third Party Funds, Not A Regular Business Checking Account 

One of the most common problems we see at the IOLTA Program is lawyers who go to a bank or credit union and open a regular business checking account to hold client and third-party funds instead of an IOLTA account. This is a violation of the Arkansas Rules of Professional Conduct and dangerous for a number of reasons. One such reason is that failing to identify the account as an IOLTA account may lead to reduced deposit insurance coverage for clients and third parties.

Attorneys who primarily practice in Arkansas are only permitted to open an IOLTA account at an institution approved by the Arkansas Access to Justice Foundation. You can find a list of our Preferred IOLTA Banks here. Don’t see your bank or credit union? Be sure to contact us before opening an IOLTA account to ensure your bank or credit union has been approved. Also, all new IOLTA accounts must be opened using the New IOLTA Account form. Using this form puts the bank or credit union on notice that the account being opened is an IOLTA account and helps us verify that the account was established in compliance with our rules.

Keep Accurate Records

A lawyer must keep a separate ledger for each client or third party with funds in their IOLTA account. This ledger must record each addition and subtraction from the client or third-party’s balance. Keeping accurate ledgers not only ensures accurate billing, but it also helps to maximize the deposit insurance limits on the IOLTA account. This is because as a trust account, the standard $250,000 deposit insurance limit applies separately to each client or third party with funds in the trust account, allowing for more than $250,000 in coverage for the IOLTA account. Note, however, that this is a general rule and may vary based on the circumstances. For instance, if the client or third party has additional accounts at the financial institution, the balances in those accounts will count against the $250,000 coverage limit for that client or third party.

Enhance Deposit Insurance Coverage

There are a couple of additional ways that lawyers can protect IOLTA deposits. For lawyers with more than $250,000 in IOLTA deposits, two options are recommended by the Arksans Access to Justice Foundation: 1) banking with multiple financial institutions for your IOLTA needs and/or 2) setting up an insured cash sweep account.

By banking with more than one financial institution for your IOLTA needs, a lawyer can reduce the risk of holding deposits in excess of deposit insurance limits. Holding multiple IOLTA accounts is permitted in Arkansas, so long as each account is established at an approved institution, using the New IOLTA Account form. However, this strategy does come with some downsides, including complicating the record-keeping required of the lawyer.

Insured cash sweep accounts offer similar benefits to holding IOLTA accounts at multiple financial institutions. The benefit of this product is reduced administrative burden on the lawyer. With this product, a lawyer is able to do business with a single financial institution and the financial institution works with partner institutions to spread deposits to maximize deposit insurance coverage. If opening an insured cash sweep account to hold IOLTA funds, the attorney should contact the Arkansas Access to Justice Foundation for guidance. These products are used less frequently than other products to hold IOLTA funds and may require extra coordination with the financial institution to ensure that the IOLTA rules are followed.

Any lawyer holding funds significantly in excess of $250,000 for a client or third party should carefully consider their fiduciary responsibilities and coordinate with the client or third party to protect the funds. This may include discussing with the client or third party which financial institution(s) will hold the fund and the type of account that will hold the funds. In some instances, it may be necessary to establish an individual trust account(s) for the benefit of the client or third party with significant funds held by the lawyer, see Arkansas Rule of Professional Conduct 1.15(b)(8).

The Arkansas Access to Justice Foundation is responsible for administering the Arkansas IOLTA Program. Interest earned on IOLTA accounts helps us fund free legal help for low-income Arkansans. Lawyers who want to support the Access to Justice Foundation’s mission should open their IOLTA account at a Preferred IOLTA Bank. These banks voluntarily pay extra interest to support our work.