§ 81.113. Violations.
(a) The IOLTA Board will refer to the Office of Disciplinary Counsel the name, address and circumstances surrounding any lawyer who, not being exempted from the maintenance of an IOLTA Account, fails or refuses to comply with the IOLTA provisions of Pa.R.P.C. 1.15 and these regulations.
(b) The IOLTA Board may reconsider its determination of IOLTA compliance based upon information obtained by the Office of Disciplinary Counsel during its investigation of a referral from the IOLTA Board for non-compliance.
Source The provisions of this § 81.110 renumbered as § 81.112 and amended November 21, 2005, effective immediately, 35 Pa.B. 6640; renumbered as § 81.113 and amended June 22, 2009, effective immediately, 39 Pa.B. 3431. Immediately preceding text appears at serial page (315899).
Appendix A
The Pennsylvania Interest on Lawyers Trust Account Board
Promulgated by the Pennsylvania Interest on Lawyers Trust Account Board and Approved by the Supreme Court of Pennsylvania
These Regulations are to be read and applied in connection with the Pennsylvania Rules of Professional Conduct. Nothing in these Regulations shall be construed to relieve a lawyer of any provision of the Pennsylvania Rules of Professional Conduct. Where these Regulations contain directives pertaining to the Interest on Lawyers Trust Account program which are more specific than those set forth in the Pennsylvania Rules of Professional Conduct, the provisions of these Regulations shall control.
Questions and Answers Concerning Pennsylvania IOLTA STATEMENT OF PURPOSE
The following is a representation of the questions most frequently asked of the Pennsylvania Interest on Lawyers Trust Account Board (the ‘‘IOLTA Board’’) and the answers given. Some of the answers paraphrase the actual Rules of Professional Conduct or Regulations of the IOLTA Board. Reference should be made to the Rules and to the Regulations when appropriate.
What is the Basic Concept of IOLTA?
Clients and third persons frequently transfer monies to lawyers to hold. Rule 1.15 of the Pennsylvania Rules of Professional Conduct generally requires the lawyer to deposit all monies of clients and third persons (‘‘Rule 1.15 Funds’’) in a Trust Account. 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 owner. These funds are known as Nonqualified Funds. But when the funds are nominal in amount or expected to be held for a short time, they cannot practically be invested to benefit the owner of the funds. These funds are Qualified Funds.
Rule 1.15 of the Pennsylvania Rules of Professional Conduct requires a lawyer to deposit Qualified Funds in a particular type of Trust Account: an income-producing IOLTA Account. The result is that funds that would otherwise earn no income can be put to constructive use.
The lawyer’s Eligible Institution transfers the income earned on IOLTA Accounts (‘‘IOLTA Funds’’), no less frequently than quarterly, to the IOLTA Board. The IOLTA 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 IOLTA requirements of Rule 1.15?
IOLTA Accounts may be maintained only at Eligible Institutions approved by the Supreme Court of Pennsylvania.
An ‘‘Enrollment Form for Lawyers and Law Firms’’ can be used to direct the Eligible Institution to open or convert one or more of the lawyer’s Trust Account(s) to income-producing IOLTA Accounts. Submit the second copy of the enrollment form, along with a list of all the lawyers who use the IOLTA Account 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 or third persons (‘‘Third Party Owners’’) and the maintenance of their IOLTA Accounts.
What will happen if a lawyer does not comply with Rule 1.15?
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.
The IOLTA Board will refer to the Office of Disciplinary Counsel the names of lawyers who do not comply with IOLTA.
Are any exemptions from IOLTA participation allowed?
Yes, a lawyer may apply for an exemption from the requirement that all Qualified Funds be placed in an IOLTA Account. However, the exemption will be granted by the IOLTA Board only for one of the reasons specified in Rule 1.15. Write to the IOLTA Board if you believe any of the permitted exemptions apply. Exemptions will be granted if:
(i) Low balance account: If the average daily balance of your current IOLTA Account, as measured over twelve months, is less than $5,000, you may request an exemption.
(ii) Account service charges routinely exceed income: If the bank service charges assessed on your current IOLTA Account routinely exceed the income earned, you may request an exemption.
(iii) Extreme impracticality or undue hardship: Under limited circumstances it would be unduly burdensome for a lawyer to maintain a Trust Account as an IOLTA Account. An example includes the lack of an Eligible Institution that offers IOLTA Accounts in the lawyer’s geographical location.
(iv) Other compelling and necessitous reasons: There may be compelling and necessitous reasons justifying an exemption from the requirement that the lawyer maintain a Trust Account as an IOLTA Account. A lawyer who demonstrates a compelling and necessitous reason for not complying with the IOLTA Board Regulations may request an exemption. A philosophical objection to the IOLTA Program or the IOLTA Board Regulations does not constitute a compelling and necessitous reason for an exemption.
What funds are to be placed in IOLTA Accounts?
Qualified Funds are monies of a client or third person received by a lawyer, that in the Good Faith judgment of the lawyer, are nominal in amount or which the lawyer reasonably expects to be held for such a short period of time that sufficient income will not be generated to justify the expense of earning income to benefit the client or third person.
A lawyer will not be liable for damages or held to have breached his or her professional responsibility because monies are deposited in an IOLTA Account pursuant to the lawyer’s judgment in Good Faith that the monies are Qualified Funds.
However, the lawyer should review the funds held in his/her IOLTA Account at reasonable intervals to determine whether circumstances have changed that require changes with respect to the Rule 1.15 Funds held in the IOLTA Account.
Who pays taxes on the income earned on IOLTA accounts?
Nobody. The Internal Revenue Service (IRS) has ruled that there are no tax consequences to the Third Party Owner, the lawyer or the IOLTA Board. Also, there is no IRS reporting requirement for the lawyer, Eligible Institution or Third Party Owner since all IOLTA accounts will use the Tax Identification Number of the IOLTA Board.
May a lawyers still open a separate account for funds of Third Party Owners?
Certainly. Rule 1.15 Funds are defined to include funds received from a client or third person in connection with a client-lawyer relationship, as an escrow agent, settlement agent, representative payee, or as a Fiduciary. Rule 1.15 Funds also include funds received as an agent, having been designated as such by a client or having been selected as such because of a client-lawyer relationship or the lawyer’s status as a lawyer. The lawyer must determine whether Rule 1.15 Funds are Qualified Funds or Nonqualified Funds. Nonqualified Funds shall be placed in a Trust Account or in another investment vehicle specifically agreed upon by the lawyer and the Third Party Owner. Nonqualified Funds which are Fiduciary Funds shall be placed either in a Trust Account or in another investment or account which is authorized by the law applicable to the entrustment or the terms of the instrument governing the Fiduciary Funds.
How does the IOLTA program affect financial institutions?
Financial Institutions are not mandated to participate in IOLTA. However, Financial Institutions that wish to offer Trust Accounts into which lawyers can deposit Rule 1.15 Funds (whether Qualified or Nonqualified Funds) must be approved by the Supreme Court of Pennsylvania. A list of Eligible Institutions can be obtained from the Disciplinary Board.
An IOLTA Account is an unsegregated Trust Account for the deposit of Qualified Funds by a lawyer. The income payable on an IOLTA Account cannot be less than the highest rate of interest or dividend generally available from the Eligible Institution to its non-IOLTA Account customers when the IOLTA Account meets or exceeds the same minimum balance and other account eligibility qualifications. Eligible Institutions remit income earned at least quarterly to the IOLTA Board.
Eligible Institutions must transmit to the IOLTA Board and to the lawyer who maintains the IOLTA Account a statement showing certain information. This includes, at a minimum, the name of the account, the service charges or fees deducted, if any, and the amount remitted from the lawyer’s IOLTA Account. If available, the Eligible Institution shall also provide information regarding the average daily balance in the account.
Where do IOLTA Funds go?
Income earned on IOLTA Accounts may be used only for the following purposes:
(1) delivery of civil legal assistance to the poor and disadvantaged in Pennsylvania by non-profit corporations which are tax-exempt under the Internal Revenue Code;
(2) educational legal clinical programs and internships administered by law schools located in Pennsylvania;
(3) the administration of justice in Pennsylvania; and
(4) the administration and development of the IOLTA program in Pennsylvania.
All disbursements and allocations of IOLTA funds are subject to the prior approval of the Supreme Court of Pennsylvania.
Who is the IOLTA Board?
The IOLTA Board is the Pennsylvania Interest on Lawyers Trust Account Board composed of nine members appointed by the Supreme Court of Pennsylvania.
What if a lawyer mistakenly deposits funds which are not Qualified Funds into an IOLTA Account?
As long as the lawyer used Good Faith judgment, the lawyer will not be liable in damages for placing Nonqualified Funds into an IOLTA Account, nor will the lawyer be held to have breached any fiduciary duty or responsibility because monies were deposited into an IOLTA Account. Additionally, if timely requested, a refund of income earned on an IOLTA Account and received by the IOLTA Board attributable to the mistaken deposit, net of an administrative charge, will be returned to the remitting Eligible Institution, unless an alternative method is approved by the IOLTA Board.
May all lawyers in a law firm use the same IOLTA Account?
Yes. If a law firm established an IOLTA Account, each lawyer who deposits all Qualified Funds in that account will be deemed to be in compliance with IOLTA. This account must be set up according to IOLTA Regulations. Each lawyer is ultimately responsible to ensure that he or she is in compliance with IOLTA.
Where may a lawyer deposit Qualified Funds?
IOLTA Accounts must be maintained in an Eligible Institution. An Eligible Institution is a Financial Institution which has been approved as a depository for trust accounts pursuant to Rule 221(h) of the Pennsylvania Rules of Disciplinary Enforcement (‘‘Pa.R.D.E.’’). Financial Institutions include those entities which are identified in Rule 1.15(a)(4) and Pa.R.D.E. 221(a)(2). Information regarding Eligible Institutions can be found at www.paiolta.org. Eligible Institutions have various deposit insurance arrangements, and some may not have deposit insurance for some deposit arrangements. Lawyers are reminded of their responsibility under Rule 1.15(b) to safeguard appropriately all funds and property in the lawyer’s possession in connection with a client-lawyer relationship.
What if a lawyer only practices law for part of the year?
The lawyer must comply with the IOLTA rules, even if he or she only practices law for part of the year.
What types of legal employment are excluded from IOLTA?
A lawyer whose employment does not result in the handling of Rule 1.15 Funds will generally be excluded from IOLTA. Examples include corporate or governmental lawyers, judges, and law school professors as long as they do not maintain a private practice.
What are some factors which should be used to determine whether monies are Qualified Funds?
Factors which can be used to determine which monies are Qualified Funds include: (1) the cost to the lawyer of establishing and maintaining account(s) benefitting the client or third person; (2) the Eligible Institution’s service charges; (3) the minimum deposit requirements; (4) the accounting fees; (5) the tax reporting requirements; (6) the nature of the transaction(s) or proceedings(s) involved; and (7) the likelihood of delay in the relevant transaction(s) or proceeding(s).
Must a lawyer who receives funds while acting as a fiduciary deposit those funds into an IOLTA Account?
Rule 1.15, as amended on September 4, 2008, specifically includes funds received by a lawyer as a personal representative, guardian, conservator, receiver, trustee, agent under durable power of attorney, or other similar positions as Rule 1.15 Funds. As such, those funds, pursuant to Rule 1.15(b), must be maintained separate from the lawyer’s own property. Pursuant to Rule 1.15(d), Fiduciary Funds continue to be governed by the law, procedure and rules governing the requirements of confidentiality and notice applicable to the fiduciary entrustment. Pursuant to the provisions of Rule 1.15(e), the delivery, accounting and disclosure of Fiduciary Funds continues to be governed by the law, procedure and rules governing the requirements of fiduciary administration, confidentiality, notice and accounting applicable to the fiduciary entrustment. If the Fiduciary Funds are Qualified Funds, they may be deposited in an IOLTA Account, or they may be maintained in another account consistent with the Fiduciary entrustment.
Must a lawyer who receives funds of clients or third persons other than in connection with a client-lawyer relationship deposit those funds in a Trust Account, including an IOLTA Account?
Under certain circumstances, yes. The responsibilities of a lawyer which are identified in Rule 1.15 with respect to funds of clients or third persons are not restricted to funds received in connection with a client-lawyer relationship. The lawyer’s responsibilities with respect to such funds may arise under Rules of Professional Conduct 1.15, 5.7 or both.
As amended by Order of the Supreme Court of Pennsylvania dated September 4, 2008, the definition of Rule 1.15 Funds specifically includes funds which the lawyer receives from a client or third person as an escrow agent, settlement agent, representative payee, as an agent having been designated as such by a client, or having been selected as an agent as a result of a client-lawyer relationship or the lawyer’s status as a lawyer. Those funds are subject to Rule 1.15 and must be kept separate from the lawyer’s own property. Pursuant to Rule 1.15(k), all Nonqualified Funds which are not Fiduciary Funds shall be placed in a Non-IOLTA Account or in another investment vehicle specifically agreed upon by the lawyer and the Third Party Owner. Qualified Funds must be placed in an IOLTA Account.
Rule of Professional Conduct 5.7 provides that a lawyer is subject to the Pennsylvania Rules of Professional Conduct with respect to the provision of both legal and nonlegal services if a lawyer provides nonlegal services that are not distinct from legal services. Rule of Professional Conduct 5.7 (e) defines ‘‘nonlegal services’’ as ‘‘services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.’’ Even if the nonlegal services are distinct from legal services, the lawyer is still subject to the Rules of Professional Conduct: (i) if the lawyer knows or reasonably should know that the recipient of the services might believe that the recipient is receiving the protection of a client-lawyer relationship, or (ii) if the lawyer is an owner, controlling party, employee, agent, or is otherwise affiliated with an entity providing nonlegal services and the lawyer knows or reasonably should know that the recipient of the service might believe that the recipient is receiving the protection of a client-lawyer relationship. In each of these cases, the lawyer will be subject to the obligations of Rule 1.15 of the Pennsylvania Rules of Professional Conduct and these Regulations as if a client-lawyer relationship existed with the recipient of the services. The lawyer then must deposit all funds of the client or a third person which are received in connection with that relationship in a Trust Account, regardless of whether the funds resulted from legal or nonlegal services. If the funds are Qualified Funds, those funds are to be placed in an IOLTA Account.
Who pays the service charges for IOLTA Accounts?
Account service charges on an IOLTA Account will be paid by offsetting the service charges against income earned on that account.
Bank charges pertaining to the lawyer’s practice (e.g. check printing charges, overdraft charges, charges for temporary extensions of credit, etc.) and costs billable to others (e.g. overdraft charges on deposited items, certified checks, wire transfers, etc.), will be the responsibility of the lawyer.
How can I find out more about IOLTA?
For additional information concerning IOLTA, contact the office of the IOLTA Board by calling (717) 238-2001. The IOLTA Board’s fax number is (717) 238-2003.
Source The provisions of this Appendix A amended November 21, 2005, effective immediately, 35 Pa.B. 6640; amended June 22, 2009, effective immediately, 39 Pa.B. 3431; amended August 7, 2017, effective immediately, 47 Pa.B. 4802. Immediately preceding text appears at serial pages (387865) to (387871).
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