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On July 17, 1996, the Supreme Court of Pennsylvania amended Rule 1.15 of the Pennsylvania Rules of Professional Conduct to establish a mandatory Interest on Lawyers' Trust Accounts (IOLTA) program. The action of the court suspended the "opt out" IOLTA program created by Pennsylvania statute in 1988 and substituted in its place the Court-administered mandatory IOLTA program.

Pennsylvania became the 27th state to implement such a program. The rule amendment requires lawyers to place all fiduciary funds they handle into interest-bearing status either to benefit the owner of the funds, or for qualified funds, the IOLTA program. The rule amendment is effective September 1, 1996.

WHAT IS THE BASIC CONCEPT OF IOLTA?

Clients and others frequently transfer moneys to lawyers to hold. When the amount is large or if the funds will be held for an extended period of time, lawyers invest them for the benefit of the client. But when the funds are small or expected to be held for a short time, they cannot practically be invested to benefit the owner of the funds.

The rule amendment of July 17, 1996 to Rule 1.15 of the Pennsylvania Rules of Professional Conduct created the mandatory IOLTA program and requires lawyers to pool these nominal and short term funds in interest-bearing IOLTA accounts. The result is that funds that would otherwise earn no interest can be put to constructive use.

The lawyer's bank transfers the interest earned on IOLTA accounts, no less frequently than quarterly, to the IOLTA Board. The Board distributes the IOLTA funds for the delivery of civil legal assistance to the poor and disadvantaged, educational legal clinical programs and internships administered by law schools, the administration of justice, and for the administration and development of the IOLTA program.


HOW DO LAWYERS COMPLY WITH THE NEW IOLTA REQUIREMENTS OF THE RULE 1.15 AMENDMENT?

Use an "Enrollment Form for Lawyers and Law Firms" to direct your financial institution to convert all of your pooled fiduciary trust accounts to interest-bearing IOLTA accounts. Submit the second copy of the enrollment form, along with a list of all the lawyers who use the IOLTA accounts in the regular course of their practice, to the IOLTA Board.

On an annual basis as part of the licensing process, lawyers are required to certify compliance with Rule 1.15 of the Pennsylvania Rules of Professional Conduct regarding the handling of funds and other property of clients and others and the maintenance of their IOLTA accounts.


WHAT WILL HAPPEN IF A LAWYER DOES NOT COMPLY WITH THE RULE 1.15 AMENDMENT?

If a lawyer does not comply with the requirements outlined in Rule 1.15 of the Pennsylvania Rules of Professional Conduct he or she will be subject to the same disciplinary penalties as any lawyer who does not comply with any of the other requirements for the practice of law in Pennsylvania.


ARE ANY EXEMPTIONS FROM IOLTA PARTICIPATION ALLOWED?

Yes, but only upon exemption requested and granted by the IOLTA Board. Write to the IOLTA Board if you believe any of the permitted exemptions apply. Exemptions will be granted if:

(A) the nature of the lawyer's practice does not require the routine maintenance of a trust account in Pennsylvania;

(B) the establishment of an IOLTA account would work an undue hardship on the lawyer or would be extremely impractical, such as the absence of an approved financial institution in the lawyer's geographical area; and

(C) the lawyer's historical annual trust account experience, based on information from the depository institution in which the lawyer deposits trust funds, demonstrates the service charges on the IOLTA account would significantly and routinely exceed any interest generated.

WHAT FIDUCIARY FUNDS ARE QUALIFIED TO BE PLACED IN IOLTA ACCOUNTS?

Qualified funds are fiduciary monies received by a lawyer that in the good faith judgment of the lawyer, are nominal in amount or are reasonably expected to be held for such a short period of time that sufficient interest income will not be generated to justify the expense of administering a segregated account.

A lawyer will not be liable in damages or held to have breached any fiduciary duty or responsibility because monies are deposited in an IOLTA account pursuant to the lawyer's judgment in good faith that the monies deposited were qualified funds for deposit in an IOLTA account.

WHO PAYS TAXES ON THE INTEREST INCOME EARNED ON IOLTA ACCOUNTS?

Nobody. The Internal Revenue Service (IRS) has ruled that there are no tax consequences to the client, the lawyer or the IOLTA Board. Also, there is no IRS reporting requirement for the lawyer, financial institution or client since all IOLTA accounts will use the Tax Identification Number of the IOLTA Board.

MAY ATTORNEYS STILL OPEN A SEPARATE ACCOUNT FOR CLIENTS' FUNDS?

Certainly. In the past, lawyers have soundly exercised their discretion in determining whether a given trust deposit was of sufficient size or duration to justify its placement in a separate interest-bearing account, with the interest payable to the owner. The amendment to Rule 1.15 does not affect the lawyer's discretion in this matter. Indeed, the Rule amendment requires lawyers to decide whether a separate interest-bearing account should be established to benefit the client or owner of the funds.

HOW DOES THE IOLTA PROGRAM AFFECT FINANCIAL INSTITUTIONS?

Financial institutions are not mandated to participate in IOLTA. However, financial institutions that wish to be depositories into which lawyers can deposit fiduciary funds, must be approved by the Supreme Court of Pennsylvania. A list of such approved financial institutions can be obtained from the IOLTA Board. It is anticipated that all approved financial institutions will offer IOLTA accounts

IOLTA accounts are interest-bearing checking accounts with interest paid at no less than the financial institution's rate paid on negotiable order of withdrawal (NOW) or super-negotiable order of withdrawal accounts. The financial institutions remit the interest at least quarterly to the IOLTA Board. The financial institutions must also notify the lawyer of the service charges or fees deducted, and the amount remitted from the lawyer's IOLTA account.

WHERE DO IOLTA FUNDS GO?

Interest earned on IOLTA accounts may be used only for the following purposes:

(1) delivery of civil legal assistance to the poor and disadvantaged;

(2) educational legal clinical programs and internships administered by law schools;

(3) the administration of justice; and

(4) the administration and development of the IOLTA program.

All disbursements and allocations of IOLTA funds are subject to the prior approval of the Supreme Court of Pennsylvania.

WHO IS THE IOLTA BOARD?

Until September 1, 1996, the IOLTA Board is the Lawyer Trust Account Board composed of 13 members. Two members are appointed by the Governor, one member each by the Speaker and Minority Leader of the House of Representatives and the President Pro Tempore and Minority Leader of the Senate; three members by the executive officers of the organized Bar and four members by the President of the Pennsylvania Legal Services.

After September 1, 1996, the IOLTA Board is the Pennsylvania Interest on Lawyers Trust Account Board composed of nine members appointed by the Supreme Court of Pennsylvania. The members are selected exclusively from a list provided to the Court by the Pennsylvania Bar Association. Three names are submitted on the list for each vacancy on the IOLTA Board.

Inquiries should be directed to:

IOLTA Board
601 Commonwealth Avenue, Suite 2400
Harrisburg, PA 17106-2445

Phone (717)238-2001

Fax (717)238-2003

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