ELC Title15 - ELC Title15Comments for ELC Title15 must be received no later than July 4, 2009.
GR 9 COVER SHEET
Suggested Amendments to
the RULES OF PROFESSIONAL CONDUCT (RPC)
Purpose of the Suggested Amendment:
The Legal Foundation of Washington suggests an amendment to RPC 1.15A, together with adoption of a new rule, ELC 15.7, and related amendments to ELC 15.4 and ELPOC 15.4 and the caption of ELC Title 15. The purpose of this proposal is to require attorneys to establish and maintain IOLTA accounts only with financial institutions that pay IOLTA accounts the highest rates generally paid to other, similarly-situated customers at that financial institution. This proposal is consistent with a national trend requiring equitable treatment of IOLTA accounts with other similar depository instruments. As of the time of the filing of this Petition, twenty states and Washington, DC have amended their IOLTA rules to contain a comparability requirement similar to the rule amendment suggested here.
Interests of the Proponent
The Legal Foundation of Washington (LFW) is a not-for-profit 501(c)(3) corporation established by the Supreme Court in 1984 to collect and distribute interest on IOLTA accounts pursuant to DR 9-102 (recodified as RPC 1.15A). In re Adoption of an IOLTA Program, 102 Wn.2d 1101, 1115 (1984). Since 1985, LFW has received interest income from attorneys’ pooled trust accounts. These funds have been used to support the delivery of civil legal aid services to low income people in Washington State.
In addition to its authority and responsibility to collect, administer and disburse IOLTA funds, LFW is also authorized to work to expand funding for civil legal aid services under its Supreme Court-approved charter. ARTICLES OF INCOPORATION OF THE LEGAL FOUNDATION OF WASHINGTON, Article IV. In recent years, LFW has actively exercised this authority by managing the Washington State Equal Justice Coalition (EJC), which educates public and governmental leaders about efforts to expand funding for civil legal aid. LFW also serves as the administrative host for the Legal Aid for Washington (LAW) Fund and the Campaign for Equal Justice, as well as the Endowment for Equal Justice, which are statewide efforts dedicated to increasing private, charitable support for civil legal aid. In 2005, LFW and the Washington Supreme Court’s Access to Justice Board (ATJ Board) requested the Supreme Court amend Court Rule 23 to direct 25% of residuals from class action law suits in state court to LFW. The Court approved this rule amendment and this has generated some incremental additional funding for civil legal aid.
The grants made by LFW are the primary source of discretionary funding to the more than 30 legal aid programs that make up Washington State’s Alliance for Equal Justice. In making decisions about how to allocate the resources available to it, LFW is guided by the ATJ Board’s Hallmarks of an Effective Legal Services Delivery System (2004)1 and State Plan for the Delivery of Civil legal Services to Low Income People in Washington State (revised May 2006)2. Over the past five years, LFW’s grant making decisions have also been guided by the Civil Legal Needs Study published by the Supreme Court’s Task Force on Civil Equal Justice Funding (October 2003).3
The degree to which low income people who experience civil legal problems are forced to face the justice system without any help is staggering. The Civil Legal Needs Study documents that:
Washington State’s civil legal aid system faces an immediate threat of significant proportions. Funding comes from three principal sources: The Federal Legal Services Corporation, the State of Washington through its Office of Civil Legal Aid, and the Legal Foundation of Washington.
Federal funding from the Legal Services Corporation has been flat for five years and is unlikely to see appreciable increases in the coming years. Despite significant gains at the state legislative level in recent years, current and prospective budget constraints present sobering obstacles to the Office of Civil Legal Aid’s efforts to close the Justice Gap chronicled in the Civil Legal Needs Study and the Task Force on Civil Equal Justice Funding’s Final Report.
IOLTA income is inherently sensitive to two principal factors – (a) the level of overall business activity which drives the number of legal transactions and correspondingly the overall level of money held in IOLTA accounts; and (b) interest rates. A significant decline in Washington State-based business activity (including, but not limited to, the level of real estate activity) has resulted in substantial reductions in average daily balances of IOLTA accounts. Similarly, interest rates have plunged in the past year, which has resulted in decreased IOLTA revenue available for civil legal aid.
Even in better times, IOLTA revenues are lagging behind where they should be.
The problem is that approved depository institutions historically have not paid market rates on IOLTA accounts. The rates paid on IOLTA accounts fall substantially below those of other similarly situated accounts.
Previously, only NOW accounts (interest-bearing checking accounts) were used for the deposit of IOLTA funds. In today’s banking landscape, this creates disparities because even IOLTA accounts which, as pooled accounts, regularly carry very large balances receive only basic checking (NOW) account interest rates from virtually every IOLTA depository. In Washington State, many banks routinely pay one tenth of one percent interest (.10%), while at the same time paying 75% of the target Federal Funds rate – more than ten times than what is paid on the IOLTA account - on other similarly sized accounts. Some banks have paid higher rates, but only out of their own goodwill. The suggested amendments will make it clear that banks must pay comparable rates on comparable balances to participate in IOLTA.
The current Washington IOLTA rule, RPC 1.15A, simply states:
In the absence of any requirement to pay more than a minimal level on interest bearing accounts, it is not surprising that financial institutions do not automatically provide return on IOLTA accounts like they do on comparable accounts. Traditional efforts in Washington State have focused on voluntary measures to persuade banks to pay higher rates. However, even with some banks paying acceptable interest rates with respect to the targeted Federal Funds rate, most financial institutions have chosen to maintain IOLTA accounts at substantially lower rates. The money that IOLTA funds have failed to earn is an “opportunity cost” that directly results in fewer civil legal aid services to vulnerable and low income people in Washington State.
LFW requests that the Supreme Court require that attorneys establish and maintain IOLTA accounts in otherwise qualifying depository institutions that treat IOLTA accounts on an equal footing with other similarly situated accounts.
The proposed comparability rule would require lawyers to maintain IOLTA accounts at eligible financial institutions that treat pooled interest trust accounts on an equal footing with other similarly-sized demand accounts – i.e., comparability of treatment. The suggested amendment offers financial institutions that maintain IOLTA accounts five different instruments with which to structure IOLTA accounts and meet the terms of comparability. It also gives financial institutions the option of how to meet the comparable rate requirements: by establishing the IOLTA account as the comparable higher rate product; by instead paying that rate on the existing IOLTA account; or by paying a “benchmark” percentage named in the rule. The rule also authorizes LFW to determine which institutions are successfully meeting the requirements of comparability. Finally, the suggested rule sets forth significant safety standards to ensure that pooled client funds are adequately protected.
The proponent has not drafted a proposed rule amendment that includes comparability for IOLTA accounts of Limited Practice Officers (LPOs), who are given a limited license to practice law in real estate closings. Instead, the proponents intend to work with the Limited Practice Board and other interested entities or persons to determine whether and when it is appropriate to similarly amend the LPO rules.
Twenty one jurisdictions have added comparability requirements to their IOLTA rule.4 States that have adopted comparability amendments to their IOLTA rules generally experience revenue increases of between 50% and 100%.
To date, not one financial institution has dropped participation in the IOLTA program due to comparability rules in any of the states that have implemented an IOLTA comparability rule. Indeed, IOLTA program administrators generally report that IOLTA comparability rules have not disrupted relationships between law firms and financial institutions. Virtually all banks have opted to pay the comparable rate on the existing IOLTA account rather than require that the higher rate product be established as the IOLTA account. That means that after banks work with the IOLTA program on implementing this, lawyers have not had to take any action to effect the new rates paid on qualified IOLTA balances. Even when banks pay comparable rates, IOLTA accounts remain profitable for the banks. Banks are only paying what they already pay to other depositors. While some banks offered initial resistance to the implementation of comparability rules, none have stopped offering IOLTA accounts and indeed, many banks have embraced the comparability rule concept with enthusiasm.
The key change recommended in order to implement comparability is the adoption of a new Rule for Enforcement of Lawyer Conduct (ELC) to become part of ELC Title 15 (Audits and Trust Account Overdraft Notification). If these changes are adopted, it is further suggested that Title 15 be re-named “IOLTA, Audits, and Trust Account Overdraft Notification.”
New ELC 15.7, in paragraph (a), defines and describes the LFW and specifies its duty to maintain a list of authorized financial institutions and prepare and annual report for the Supreme Court. Most of these provisions at present are found in RPC 1.15A and are relocated to ELC 15.7. Paragraph (b), a definitions section, defines a number of financial concepts relevant the types of IOLTA accounts that may established. Paragraph (c) sets forth the requirements that a financial institution must adhere to in order for the LFW to list the financial institution as authorized for lawyers to use for IOLTA accounts. Paragraph (d) states fundamental requirements for all trust accounts (both IOLTA accounts and non-IOLTA trust accounts). Paragraph (e) establishes the requirements that IOLTA accounts must pay comparable rates of interest and remit that interest to the LFW. It also defines the types of account fees and service that may be charged on IOLTA accounts. In addition, paragraph (e) sets forth the forms of IOLTA accounts that may be used.
The suggested amendments to RPC 1.15A are primarily designed to shift provisions relating to the function of LFW, the nature of authorized financial institutions, the requirements for financial institutions to become authorized, the system for remittance of interest to LFW, and the like, to new ELC 15.7. Thus, the focus of RPC 1.15A (with respect to funds) will be on the lawyer’s obligation to hold client funds in a trust account, to choose the proper type of trust account under the circumstances, and to choose a financial institution that is on the LFW’s “authorized” list. The text of amended RPC 1.15A references the provisions in ELC 15.7, making it clear that in selecting a financial institution a lawyer’s obligation is to exercise ordinary prudence and to choose a financial institution on the authorized list. Newly drafted comments  –  further explain the relationship between the RPC 1.15A and ELC Title 15. These amendments will achieve a beneficial simplification of RPC 1.15A. Apart from the deletion of several provisions to be located in ELC 15.7 and the addition of references to ELC 15.4 and 15.7, the only significant change to the text of RPC 1.15A specifies that LFW determines which financial institutions may be selected by a lawyer when depositing funds into a trust account. One word (“transaction”) has been added to paragraph (a) to correct a clerical error that has existed since the adoption of RPC 1.15A in 2006.
Finally, amendments to ELC 15.4 and ELPOC 15.4 shift responsibility for receipt and administration of trust account notification agreements from the WSBA Disciplinary Board to the LFW. Currently, administrative functions related to the IOLTA program are being performed by both the LFW and the WSBA. In light of the other changes being recommended, it is appropriate, in order to avoid duplication of effort and potential confusion, for the LFW to maintain a master list of all authorized financial institutions. The financial institutions will still be required to file overdraft notification agreements (though they would now be filed with the LFW rather than the Disciplinary Board) and to report trust account overdrafts to the WSBA, but the LFW would manage all of the clerical and administrative aspects of this process. This change will improve the administration of the IOLTA program with no perceptible drawbacks.
4 The jurisdictions include that have adopted and implemented comparability rules are Florida, Connecticut, Michigan, Ohio, Illinois, Massachusetts, New York, California, New Jersey, Maryland, New Mexico, Utah, Missouri, Pennsylvania, Texas, Washington, DC, Hawaii, Alabama, Arizona, Minnesota, and Maine.
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