BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2007-2008 Regular Session
AB 1723 A
Assembly Committee on Judiciary B
As Amended June 13, 2007
Hearing Date: June 26, 2007 1
Businesses and Professions Code 7
GWW/ss 2
3
SUBJECT
Attorneys: Interest on Lawyer Trust Accounts (IOLTA)
DESCRIPTION
This bill would revise the laws governing IOLTA accounts
and would require attorney and law firms to deposit or
invest their IOLTA accounts, as newly defined, in financial
institutions that offer high yielding interest or dividend
accounts.
BACKGROUND
The Judicial Council reports that California courts are
facing an ever increasing number of parties who go to court
without legal counsel, largely because they cannot afford
representation. IOLTA proceeds are a significant source of
funding legal services for the poor, providing over $10
million in revenue in 2005 to the State Bar's Legal
Services Trust Fund Program which distributes grants to
legal services agencies. However, IOLTA proceeds have
dropped over 59%, from 1993 to 2005, contributing to an
already wide "justice gap" between the legal needs of
low-income people and the legal assistance they are able to
receive.
CHANGES TO EXISTING LAW
Existing law , the State Bar Act, requires an attorney or
law firm that receives or
disburses trust funds to establish an interest bearing
(more)
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demand trust account and to deposit in the account all
client deposits that are nominal in amount or are on
deposit for a short period of time.
Existing law requires the account to be established with a
bank or other financial institution authorized by the
Supreme Court, and requires the depository
institution to meet certain requirements, including
transmitting a remittance statement to the Supreme Court.
Existing law requires that the earnings from these trust
accounts be paid to the State Bar to be used for programs
to fund free legal services for indigent persons.
This bill would instead require attorneys and law firms to
deposit or invest the specified client funds in IOLTA
accounts, as defined, and would require that the interests
or dividends earned on the accounts be paid to the State
Bar of California. The IOLTA account must be established
and maintained with an eligible institution offering or
making available an IOLTA account meeting specified
interest or dividend paying requirements, including
offering a rate of interest or dividends on the IOLTA
account that is not less than that generally paid to
nonattorney customers on similar accounts.
The bill would not require a financial institution to offer
the specified IOLTA accounts. If offered, the bill would
authorize an eligible institution to deduct only reasonable
service or maintenance fees in accordance with customary
practice of the institution for non-IOLTA customers,
payable only from the interest or dividends on the account,
and would make any other fees or service charges the sole
responsibility of the lawyer or law firm maintaining the
IOLTA account. The bill would require an eligible
institution's remittance statement to include the average
balance for each account for each month.
The bill would require the financial institution to remit
interest or dividends on the IOLTA account, less reasonable
fees, to the State Bar at least quarterly, and to transmit
with each remittance a statement showing the name of the
attorney or law firm for whom the remittance is sent, and
for each account the rate of interest applied or dividend
AB 1723 (Assembly Committee on Judiciary)
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paid, and the amount and type of fees deducted, if any, and
the average balance for each account for each month of the
period for which the report is made.
The bill would define "IOLTA account" to mean an account or
investment product that is established and maintained by a
lawyer or law firm as required by law that is (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.
The bill would define "eligible institution" to mean a bank
or such other financial institutions as are authorized by
the Supreme Court, and would enact related provisions
governing the IOLTA account that is an investment sweep
product.
COMMENT
1. Stated need for bill
The State Bar of California, sponsor of AB 1723, writes:
AB 1723 would modernize statutes related to Interest
on Lawyer Trust Accounts (IOLTA) by expanding the
types of accounts in which IOLTA funds may be
deposited. Under current law, only eligible financial
institutions may hold IOLTA accounts, and those
accounts are limited to standard interest-bearing
checking accounts. The bill would permit eligible
financial institutions to offer both deposit and
investment IOLTA accounts, and to charge appropriate
fees for such accounts. The bill also would provide
that eligible financial institutions may maintain
existing deposit accounts that meet certain
eligibility requirements but pay rates on those
accounts that would be earned if those funds were
instead in investment accounts. As is current law,
attorneys would be permitted to place IOLTA funds in
eligible institutions.
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Interest on Lawyers Trust Accounts are required to be
established by all California attorneys holding client
funds that do not warrant setting up a separate
account, either because they are small in amount or
are being held for a short period of time. The
interest earned on these unsegregated accounts helps
provide free civil legal aid through the State Bar's
Legal Services Trust Fund Program. When the IOLTA
concept was introduced 25 years ago, interest-bearing
checking accounts were the only instruments available
that were deemed appropriate for holding IOLTA funds.
In the ensuing decades, banks have introduced new
products that offer much higher interest rates while
at the same time providing equivalent levels of safety
and liquidity to the customer.
Overall IOLTA interest rates in California are just
over one percent, and have remained flat despite a 425
percent increase in the benchmark Federal Funds rate
over the past four years. The bulk of IOLTA accounts
are currently earning only a fraction of what they
would if California had permitted the use of
higher-yield bank products. The Legal Services Trust
Fund Commission estimates that legislation such as AB
1723 could more than double the money available to
legal services through the IOLTA program.
According to the statistics from the California
Commission on Access, IOLTA funding produced $10,180,796
in revenue in 2005 for the Legal Services Trust Fund
Program (LSTFP). In comparison, IOLTA funding in 1993
generated $18.9 million, which if adjusted for inflation
would be $24.8 million. Initiatives by the LSTFP have
produced some success with its work with banks,
encouraging them to reduce service charges and/or
increase the interest rates they are paying on IOLTA
accounts, to the point of increasing revenues
approximately $115,000 monthly or $1.4 million on an
annual basis. However, that increase is still far less
than what is needed to adequately fund legal services.
2. Proposal is also an important recommendation of the
California Commission on Access
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In its recent "Action Plan for Justice" report issued in
April 2007, the California Commission on Access to
Justice documents the severe drop in revenues from IOLTA
funding and its impact on legal services funding. On
pages 39 and 40 of the report, it notes the current
effort of the State Bar (through AB 1723) to increase the
yields from IOLTA accounts by enactment of the
"Comparability Initiative" which would expand the types
of accounts permitted by IOLTA use and require
comparability of net yields on IOLTA accounts.
(The Commission is comprised of 24 members reflecting a
nonpartisan cross-section of judges, lawyers, business,
academic and community leaders, and other experts on the
delivery of legal services and the administration of
justice. Members are appointed by the Governor, the
Legislature, the Attorney General, the Judicial Council,
the State Bar, the California Judges Association, the
California Chamber of Commerce, the California Labor
Federation, and others.)
In support of AB 1723, the Commission writes: "This
legislation will increase fairness in the handling of
IOLTA accounts and update a system that is seriously
outdated?. This legislation was one of the most important
recommendations in our recent report, 'Action Plan for
Justice'?. With two thirds of the legal needs of
low-income Californians not being addressed, there is
clearly a need for increased funding to address the
safety and security of our state's most vulnerable
families and children. By enacting this legislation, we
can ensure that the existing mechanisms for funding legal
services programs receive the revenue they deserve in the
marketplace."
The significance of IOLTA interest rates is underscored
because it has been a significant source of the state's
system of funding for California legal services programs.
However, IOLTA interest rates have been depressingly low
and, as a result, funding for legal services programs has
suffered. From 1993 to 2005, IOLTA revenue decreased by
59% in real dollars. By increasing IOLTA revenue,
proponents assert that the state will be better able to
meet the needs for equal access without putting
additional pressure on the state budget.
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By any measure California suffers from an overwhelming
"justice gap" between the legal needs of low-income
people and the legal assistance available to them. The
lack of adequate legal services not only disadvantages
people with legal problems, it compromises their
confidence in the legal system and impairs the
administration of justice.
As the Chief Justice is quoted in the Commission on
Access Report: "To maintain the strength of our state and
nation, we must ensure that we have a court system with
integrity - one that is fair and objective, that hears
and resolves disputes in a timely manner, that is open
and truly accessible to all, and finally that is worthy
of the respect and confidence of the public we strive to
serve."
Enactment of AB 1723 would help in closing the "justice
gap."
3. Other support arguments
Over 50 large firm partners, presidents, and general
counsel of large companies joined a letter in support of
the bill under the auspices of Bet Tzedek Legal Services
and Public Counsel, stating:
We strongly support AB 1723, which will significantly
enhance the provision of free, top-quality civil legal
services to California's most vulnerable citizens.
Last year, Public Counsel and Bet Tzedek served over
40,000 low-income children, families and seniors on a
wide array of critical legal issues. Both
organizations depend upon IOLTA funding for their
work, including their programs to adopt children out
of the foster care system, protect seniors from
consumer fraud and elder abuse, preserve and create
affordable housing for low-income Californians, and
assist fledging businesses and not-for-profit
organizations in the poorest areas of our communities.
Bet Tzedek and Public Counsel are unable to serve all
eligible people who seek their assistance and, indeed,
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low-income Californians' overwhelming need for legal
assistance is a statewide problem. A recent study by
the federal Legal Services Corporation found that only
one in three eligible, low-income Californians
receives needed legal assistance. AB 1723 will help
close this "justice gap," by correcting an outdated
aspect of the IOLTA legislation and generating
significantly higher revenues for the IOLTA program.
These revenues will translate into housing, medical
care, and other vital support and protections for the
thousands of additional people who will receive
assistance from Public Counsel, Bet Tzedek and other
organizations throughout California.
4. Similar measures have been enacted in 11 other states
"With the enactment of AB 1723," the State Bar further
writes, "California will join nearly a dozen other states
that have successfully implemented the modernization of
IOLTA accounts. As a result, significantly more
critically-needed funding has been made available for
legal services."
The State Bar reports that Ohio, Florida, Texas,
Illinois, Michigan, Alabama, Massachusetts, New Jersey,
Connecticut, Minnesota, and Mississippi have implemented
statutes similar to AB 1723.
5. Role of financial institutions under AB 1723
AB 1723 would set out various optional courses of conduct
for financial institutions. First, and most important of
all, AB 1723 does not require financial institutions to
offer the desired higher yielding IOLTA accounts.
However, market competition may compel a financial
institution to offer the higher yielding accounts if
other financial institutions in the area are offering the
product. Also, customer service and community reputation
may also dictate that choice if there is demand from the
attorney community or the community at large.
Moreover, if an IOLTA account is offered, the bill would
also make it clear that an eligible institution has no
affirmative duty to offer or make investment products (as
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opposed to interest-bearing checking accounts) available
to IOLTA customers. However, if an eligible institution
offers or makes investment products available to
non-IOLTA customers, in order to remain an IOLTA eligible
institution, the financial institution must make those
products available to IOLTA customers or pay an interest
rate on the IOLTA deposit account that is comparable to
the rate of return or the dividends generally paid on
that investment product for similar customers meeting the
same minimum balance and other requirements as the IOLTA
account. Concurrently, a lawyer would not be compelled
to use the proffered higher yield investment account and
may opt to stay with an interest bearing checking account
and still be in compliance with this bill. This choice
would be made by lawyers not wishing to personally assume
the liability for investment losses.
Thus, a financial institution may continue to offer
"interest bearing checking accounts" as an IOLTA account
to remain as an eligible institution, and the attorney or
law firm may select this option. However, the financial
institution would be required to pay an interest rate on
that account that is comparable to a rate generally paid
for similar non-IOLTA accounts. In short, if the
financial institution is paying 3% annual interest on
other similar checking account deposits, then the
financial institution must offer to pay the same rate and
assess the same fees for its IOLTA interest bearing
checking accounts. It cannot, as many do now, pay only
1% per annum interest.
This so-called "interest rate comparability" requirement
could raise significant revenue for legal services
programs. The "yield gap" is particularly dramatic for
large accounts - those of $100,000 or more. As an
example, the three largest banks in California offer
investment sweep accounts paying 4.0 to 4.3 percent for
balances of $100,000 or more. IOLTA account customers
with comparable balances in the same bank earn between
0.47 and 1.63 percent on their interest bearing checking
accounts. According to the State Bar, 77 percent of the
total principal in current IOLTA accounts in held in
accounts of $100,000 or more.
If the eligible institution elects to pay that higher
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interest rate, the eligible institution may subject the
IOLTA deposit account to equivalent fees and charges
assessable against the investment product. (And,
concurrently, if the lawyer did not wish to assume the
costs of excess extra fees that are not paid by the
interest earned on the IOLTA account, the lawyer may stay
with the low yield checking account and still be in
compliance.)
The bill would also provide that in determining the
interest rate or dividend payable on any IOLTA account an
eligible institution may consider, in addition to the
IOLTA account balance, risk or other factors customarily
considered by the financial institution when setting the
interest rate or dividends for its non-IOLTA accounts,
provided that such factors do not discriminate between
IOLTA customers and non-IOLTA customers and that these
factors do not include the fact that the account is an
IOLTA account.
Finally, the bill would provide that a financial
institution would have no responsibility for selecting
the deposit or investment product chosen for the IOLTA
account.
Committee staff has not received any comments regarding
AB 1723 from any financial institution or its
representatives. According to the sponsor, the
California Bankers Association is neutral on the bill.
6. Issues for consideration
a) Should the law allow an attorney to "invest" a
client's funds, so long as the risk of loss is on the
lawyer?
In amended Business and Professions Code Section
6211, AB 1723 would require the attorney or law firm
to "deposit or invest" client funds in an IOLTA
account. Traditionally, lawyers have not been allowed
to "invest" a client's funds. However, according to
the sponsor and the California Bankers Association,
use of the term "invest" is specifically needed to
enable lawyers to invest in the higher yield IOLTA
accounts, which is broadly defined to include
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investment vehicles such as a sweep account or any
other investment product authorized by California
Supreme Court rule or order. As noted earlier,
lawyers would have the option of declining to invest
in the higher yield accounts, as some may because they
would not to assume the personal liability for
investment losses or excess fees on the account.
b) If an eligible institution cannot be found in the
lawyer's community, would the lawyer be exempt from
disciplinary action or would he or she be required to
find the nearest eligible institution, even if it is
miles away?
AB 1723 would require lawyers and law firms to
deposit or invest specified client funds in an IOLTA
account with an eligible institution, but does not
require financial institutions to offer any IOLTA
accounts as defined by the bill. For example, in a
small community with only one or two financial
institutions, and only a few more lawyers, the
financial institutions might choose, as is their
choice, not to offer the IOLTA products. For them, it
is a simple business decision. They are only paying
out 1% or so under the current Lawyers Trust Fund
Accounts, so why should they cut their profits and
offer to pay a higher rate of interest if the lack of
market competition does not require them to do so? In
that situation, rare but not entirely unlikely, AB
1723's requirement could force a lawyer to undertake
extraordinary efforts to comply or else face possible
disciplinary action.
WOULD LAWYERS FACE A HOBSON'S CHOICE IF FINANCIAL
INSTITUTIONS DO NOT OFFER THE NEEDED IOLTA PRODUCT?
The author's office has responded that banks often
compete for IOLTA business and, therefore, the
scenario is not likely to arise. Even so, they
contend, there may be the option of internet banking.
c) Should a delayed operative date be added to avoid
potential confusion by lawyers ostensibly subject to
the new requirement on January 1, 2008?
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If enacted, AB 1723 would become effective and
operative on January 1, 2008. However, according to
the State Bar, implementing rules and regulations must
still be prepared for adoption by the Supreme Court.
Thus, lawyers reading the statute would believe they
need to comply beginning January 1, 2008, but the
ability to comply may not be in place until the
adoption of the Supreme Court rules. Needless
confusion and phone calls to the State Bar could be
avoided if a delayed effective and operative date of
July 1, 2008 is added, so that the Supreme Court would
have adequate time to adopt the necessary
implementation rules to enable compliance by lawyers
and law firms.
Suggested amendments
On both page 2, line 15, and on page 3, line 20,
strike out "An" and insert: Effective July 1, 2008, an
Support: Attorney General; Judicial Council; California
Commission on Access to Justice; Alameda County
Bar Association; Alliance for Children's Rights;
Asian Pacific American Legal Center; AIDS Legal
Referral Panel; Bar Association of San Francisco;
Bet Tzedek Legal Services; California Advocates
for Nursing Home Reform (CANHR); Californians for
Legal Aid; California Council of Churches IMPACT;
Child Care Law Center; Community Legal Services;
Consumer Attorneys Association of Los Angeles;
Contra Costa County Bar Association; Disability
Rights Education Defense Fund (DREDF);
Greenlining Institute; Harriet Buhai Center for
Family Law; HIV and AIDS Legal Services Alliance;
Inner City Law Center; Legal Aid Association of
California; Legal Aid Foundation of Los Angeles
(LAFLA); Legal Aid Society of Orange County
(LASOC); Legal Services of Northern California;
Legal Services for Prisoners with Children; Los
Angeles County Bar Association; Mental Health
Advocacy Services, Inc.; Orange County Bar
Association; Protection and Advocacy, Inc. (PAI);
Public Advocates, Inc.; Public Counsel, Los
Angeles; Public Law Center, Orange County; San
AB 1723 (Assembly Committee on Judiciary)
Page 12
Diego County Bar Association; Ventura County Bar
Association; Western Center on Law and Poverty;
Youth Law Center; Over 50 law firm partners,
presidents and general counsel of various
California businesses
Opposition:None Known
HISTORY
Source: State Bar of California
Related Pending Legislation: None Known
Prior Legislation:None Known
Prior Vote:Assembly Floor: Ayes 65, Noes 7
Assembly Judiciary: Ayes 10, Noes 0
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