WisTAF and banks debate petition seeking comparable interest rates on IOLTA accounts at Wisconsin Supreme Court

On Nov. 18, the Wisconsin Supreme Court adopted in principle several amendments to SCR 20:1.15 relating to safekeeping property of trust accounts and fiduciary accounts. The changes relate to banks paying comparable interest on lawyer trust accounts. The court will study several issues before making its final ruling. The new rule will be effective July 1, 2009, which will give banks enough time to be in compliance with the new rule.

“WisTAF petition 08-03 seeks an interest comparability rule for Interest on Lawyers Trust Accounts (IOLTA),” said WisTAF Vice President Dean Dietrich. “The proposed amendments would require attorneys to hold IOLTA accounts at financial institutions that pay those accounts the highest interest rate generally available at that institution to other customers when IOLTA accounts meet the same account qualifications.”

IOLTA funds are derived from interest paid on lawyer trust accounts, and those monies are used to fund the grants from the foundation to support legal services for the poor and needy.

“The Foundation has worked with the State Bar of Wisconsin, the Office of Lawyer Regulation, and on several occasions with the Wisconsin Bankers Association,” said Dietrich. “The purpose of the petition is not to criticize Wisconsin banks. The banks have been very supportive of the IOLTA program. They have set rates that establish and pay interest on trust account in their banks.”

Appearing on behalf of the Wisconsin Bankers Association (WBA) and the Community Bankers of Wisconsin (CBW), Madison attorney John E. Knight, Boardman Law Firm, told the court, “In general, the WBA and the CBW are unopposed to a rule that would require IOLTA accounts be treated equitably by earning interest comparable to that earned by similarly situated non-IOLTA customers of financial institutions. WBA and CBW member banks are supportive of the IOLTA program and have been helpful in the creation and maintenance of IOLTA accounts under the WisTAF program. The WBA and the CBW are confident that banks in this state are treating IOLTA accounts equitably and comparably to non-IOLTA deposit accounts.”

The court invited Knight and WisTAF Vice President Dean Dietrich, Wausau to appear simultaneously to help both entities hammer out their differences and give clearer guidance to the court on the issues. The court ruled on the following key issues.

Lawyer choice. WBA/CBW suggested that the trust account rule should require that the choice of account type should be made by lawyers and law firms, not by the bank, as proposed in the new rule. The court ruled that WisTAF, as the beneficial owner of the interest earned on the account, should be responsible for deciding if a higher paying product meets comparability requirements.

Certified IOLTA banking institutions.  WBA/CBW expressed concern that publishing a list of approved IOLTA participating institutions, as proposed in the petition, would negatively affect financial institutions not certified as IOLTA institutions and could possibly create competition among banking institutions. WisTAF stated that publishing the list is in the public interest to help lawyers and law firms work with banks that are in compliance with the rule. The court ruled that WisTAF will publish a list of institutions that are in compliance.

Benchmark interest rates. One major area of disconnect between WisTAF and the Wisconsin Bankers Association was section (cm)(4)c.3., which states that an IOLTA participating institution may pay a rate equal to 70% of the federal funds target rate in lieu of paying a rate of one of the other account alternatives.

“The WBA and the CBW suggest that 70% of the federal funds target rate is not a fairly established rate for this state, and that a rate more conforming to practices in Wisconsin would be 55%,” Knight said. “Our research indicates that banks in Wisconsin pay substantially less than the federal funds target rate for money market accounts maintained by bank customers. Only five other states have adopted a rate equal to 70% or more of the federal funds target rate. If Wisconsin adopts the 70% safe harbor rate, it will have the second highest rate of any state in the country.”

WisTAF agreed to meet with WBA/CBW to settle on a percentage for submittal to the court before the end of the year.

Effective date. WisTAF agreed to a July 1, 2009 effective date, rather than the April 1, 2009, as proposed in the petition.

Read an in-depth explanation and petition 08-03 in the October Wisconsin Lawyer™ magazine.