A Word on Fiduciary Funds
Questions sometimes arise as to whether a lawyer is holding client funds in a fiduciary capacity. A lawyer acts in a fiduciary capacity when serving as a personal representative, guardian, conservator, receiver, trustee, agent under a power of attorney, or other similar position. “Fiduciary funds” are defined simply as Rule 1.15 Funds which the lawyer holds as a fiduciary. If fiduciary funds are strictly subject to the IOLTA account requirements discussed below, the proper performance of fiduciary investment duties would be difficult.
Rule 1.15 and Rule 221 each provide that fiduciary funds must be placed in a trust account, or in another investment or account which is authorized by law or which is authorized by the agreement governing the fiduciary relationship. Accordingly, a lawyer may maintain fiduciary funds in vehicles other than trust accounts or IOLTA Accounts (as these terms are defined in Rule 1.15). However, if fiduciary funds are held in a trust account, the trust account must be maintained in an “eligible institution.” If fiduciary funds held in a trust account and are “qualified funds” as discussed below, such fiduciary funds must be held in an IOLTA Account.
An agreement, such as an agreement of trust, may provide the requisite authorization for the lawyer acting as a fiduciary to make non-trust account investments. Alternative investments and accounts are authorized by law in the fiduciary context by Pennsylvania’s Prudent Investor Rule, which gives the fiduciary authority to invest in every kind of property and type of investment, including, but not limited to, mutual funds and similar investments. 20 Pa. C.S.A. § 7203(b). The Prudent Investor Rule thus serves as an “umbrella” authorizing wide investment latitude in the fiduciary context. It should also be noted that Comment 6 to Rule 1.15 states that funds that are controlled by a non-lawyer professional co-fiduciary are not considered Rule 1.15 funds. This means that funds controlled by an institutional co-fiduciary, such as an institutional trustee, are not subject to Rule 1.15. Institutional co-fiduciaries are subject to industry specific laws and regulations. Notwithstanding the foregoing, a lawyer’s handling of fiduciary funds remains subject to Pennsylvania law governing fiduciary relationships.
The lawyer’s responsibilities under Rule 1.15 apply when the lawyer acts as an escrow agent, settlement agent, or representative payee. Money or property received while wearing any of these hats is Rule 1.15 Funds that must be held in an appropriate trust account.