Delaware Bar Foundation
Delaware IOLTA Program
Frequently Asked Questions for Financial Institutions
1. What does the new IOLTA Rule do?
Requires lawyers to maintain pooled escrow or trust accounts with financial institutions which pay interest or dividends on IOLTA accounts which are at least as high as the interest or dividends paid by that financial institution on similarly situated non-IOLTA accounts (comparability).
Makes participation in IOLTA by lawyers and/or law firms mandatory.
Defines institutions eligible to hold IOLTA accounts as only those institutions which agree to pay IOLTA account customers the highest interest rate or dividend generally available at their own institution to similarly situated non-IOLTA customers. The rule change requires higher rates to be paid to qualifying IOLTA accounts only if those rates are already available to similarly situated non-IOLTA accounts.
Specifically authorizes the use of U.S.Government money market funds and repurchase agreements collateralized with US Government securities.
Defines allowable reasonable service charges.
2. Why are these changes necessary?
The interest rate parity provisions (comparability) and investment options were created to recognize that bank products and technologies have evolved significantly since IOLTA programs began. The rule changes were proposed to ensure IOLTA accounts receive the same benefits as similarly situated, non-IOLTA accounts.More than32IOLTA programs in other states have adopted similar language in their Rules, including Delaware’s neighbor states New York, New Jersey, Pennsylvania, Maryland and the District of Columbia.
3.Doesn’t the Rule regulate financial institutions?
No. The requirements of the Rule regulate the behavior of lawyers, who are required by the new rule changes to place their IOLTA accounts at financial institutions that pay interest rates on IOLTA accounts comparable to those paid to non-IOLTA customers. The Supreme Court, in the proper course of regulating attorneys, has adopted criteria that lawyers must follow when choosing a financial institution for its IOLTA accounts. However, participation has always been and continues to be voluntary for financial institutions.
4. Doesn’t the Rule set IOLTA interest rates?
No. The Rule does not set rates, or compare rates among banks. Rates paid are set by each bank for its own customers and are based on all the factors a bank normally considers when it sets its own rates. The new rule only requires a financial institution participating in the IOLTA program to pay interest rates comparable to what it already pays its similarly situated non-IOLTA customers.
5. What are the product options available for IOLTA accounts?
The rule requires that IOLTA accounts earn interest comparable to other bank products with similar balance requirements and which meet other restrictions at that financial institution. It also allows qualifying funds to be invested in repurchase agreements fully collateralized by U.S. Government securities or money market mutual funds which invest solely in U.S. Government securities. A financial institution can also choose to pay a “Safe Harbor” interest rate as defined in the rule.
6. What is the Safe Harbor interest rate?
The Safe Harbor rate, as defined in the Delaware Rules of Professional Conduct, Rule 1.15 (h)(1)(C)), is equal to the higher of 0.65% per annum or 65% of the Federal Funds Target Rate. The SafeHarbor rate is a net rate, meaning no fees can be deducted that would reduce the yield below the stated rate.
7.What is the benefit of choosing the “Safe Harbor” interest rate?
The purpose in establishing an index (i.e.“Safe Harbor”) rate is to allow for a quick and easy way for financial institutions to obtain compliance with the revised rule, without an exhaustive evaluation of their existing product portfolio, and to have a flexible interest rate that moves with other short term rates. It is also a way for financial institutions that may have higher internal rate structures to limit the absolute rate they would have to pay to one that is based on an overall comparable rate for the state. The Safe Harborrate is presented as an additional choice for financial institutions, and it may make sense for some institutions, but is not required for participation in the IOLTA program.
8. Once we choosethe Safe Harbor option, can we switch to another option later?
The election of the Safe Harbor option results in an automatic determination of eligibility under the revised Rule, without further review by the Delaware Bar Foundation of an institution’s product offerings. However, there is no requirement that a financial institution choose this option initially, or having once chosen it, remain with the Safe Harbor option indefinitely. In order to change options, the Foundation only requires submission to it of a revised Financial Institution Compliance Statement (for example, documenting and applying the rate of the highest comparable rate product) and a reasonable administrative review period to evaluate the revised election.
9. If we offer no other type of account, does this mean we can continue to offer only our NOW account?
It is important to review your entire portfolio of products to make sure there are no other comparable products, including tiered or preferred rate products for which IOLTA accounts would qualify. And we are happy to help you review your options. But if your institution only offers a single NOW account, then you will simply need to certify this factto the Delaware Bar Foundation on its Financial Institution Compliance Statement.
10. Do we have to create multiple types of IOLTA accounts based upon different qualifications and rates?
No. If you’d prefer, we can work with you to create a single blended rate or tiered rates that are based on the current portfolio of products, without establishing IOLTA accounts in those different product types.
11. We have an investment company subsidiary. Is it necessary to offer the subsidiary’s products as IOLTA accounts?
Only if you wanted the subsidiary to hold IOLTA deposits in eligible accounts. If not, then you only need to be concerned with your banking products. However, if you offer bank customers an automatedtransfer (sweep) to an external investment (whether a subsidiary or not), such as a money market mutual fund, you must offer that service or comparable rate to qualifying IOLTA customers.
12. Can we factor in the interest rate our specialized customer service?
How you structure your rates internally is your decision, and we understand institutions may chooseto provide value to customers in other ways than strictly pricing, including higher levels of service. We only need to ensure the IOLTA accounts are being treated equally and are earning the same rates as other depositors, whatever those rates are.
13. What fees can we charge against the IOLTA interest ?
The allowable reasonable fees for IOLTA accounts that may be charged against the IOLTA interest are: per check charges, per deposit charges, an account maintenance fee, federal deposit insurance fees, automated investment (“sweep”) fees, and a reasonable IOLTA administrative fee. Allowable reasonable fees cannot exceed those charged on comparable non-IOLTA accounts. All other fees, including but not limited to overdraft, wire transfer, account analysis and cash management fees (with the exception of sweep fees) are the responsibility of, and may be charged to, the lawyer or law firm maintaining the IOLTA account. The Safe Harbor Rate is a net rate and no fees may be deducted from that rate.
14. Can we factor in sweep or other fees in the rate?
Allowable reasonable fees can be deducted from (but not in excess of) the interest earned on an IOLTA account. Sweep fees in particular can be considered on a “net yield” basis, that is, paying the equivalent after fee effective rate, without actually charging the fees. All net yield equivalent rates must be approved by the Delaware Bar Foundationin advance.
15. What if some accounts qualify for a higher interest rate product and others don’t?
The Rule allows financial institutions to pay different rates on different accounts. However, it may be a more practical alternative to consider a single blended rate, or tieredrates which are calculated and based upon the different products or rates for which individual accounts may qualify.
16. Would attorneys have to change to banks paying higher rates?
No. The comparability provisions of the IOLTA Rule only require a financial institution to pay its own IOLTA customers the highest interest rate generally paid to its own non-IOLTA customers with comparable accounts. It does not require a financial institution to pay rates other than that which the bank itself has established
17. What if a financial institution doesn’t offer higher rates of interest to non-IOLTA customers with comparable accounts?
The financial institution would be in compliance with the rule, as long as it is paying comparable rates to its IOLTA and non-IOLTA customers. The financial institution is required to do no more than pay the same rates on IOLTA accounts as it already pays on similarly situated non-IOLTA accounts. For example, most financial institutions offer non-IOLTA depositors preferred interest rates for larger balances. However, many of these same institutions do not distinguish between very small and very large balance IOLTA accounts. The rule simply requires that they now pay the large balance IOLTA account the same rate it would otherwise qualify for, were it not an IOLTA account.
18. How will attorneys know if their financial institution is an eligible IOLTA institution?
The Foundation will maintain a list of eligible financial institutions on its website at
Institutions will be certified as eligible by the Delaware Bar Foundation upon a determination that they are in compliance with the Rule and based on the documentation and ongoing reporting the institution will file with the Foundation
19. What happens next?
The IOLTA Financial Institution Compliance Statement and any necessary supporting documentation must be returned to the Delaware Bar Foundation by September 3, 2010.
The Foundation will publish its initial list of eligible financial institutions on its website on or about October 1, 2010.
Delaware lawyers and law firms must ensure compliance of existing pooled trust/escrow client accounts, or open any new required accounts, by November 1, 2010. If a financial institution requires lawyers to convert existing accounts by opening a new account, lawyers will use the new Notice To Financial Institution Form to convert the existing account; lawyers will also use this same form to open new IOLTA accounts. The former IOLTA Participation Letter will no longer be used.
Delaware lawyers and law firms may only maintain IOLTA accounts in financial institutions certified as eligible by the Delaware Bar Foundation as of November 1, 2010.
20. Where can I get more information about the new rule?
For additional information, please contact:
Jacqueline Paradee Mette
Delaware Bar Foundation
100 W. 10th Street, Suite 106
Wilmington, DE 19801
Tel: 302-658-0773
Fax: 302-658-0774
Email:
Web:
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