MEMORANDUM

FROM:           Cassie Hanson

Assistant Director

                        Office of Lawyers Professional Responsibility

RE:                  TRUST ACCOUNT OVERDRAFT NOTIFICATION AGREEMENT

Rule 1.15, Minnesota Rules of Professional Conduct (MRPC), is the rule pertaining to lawyer trust accounts.  Among other things, it requires lawyers to maintain their client trust accounts only in financial institutions that have signed an agreement to report to this Office “in the event any properly payable instrument is presented against a lawyer trust account containing insufficient funds, irrespective of whether or not the instrument is honored.”

On December 21, 2006, the Minnesota Supreme Court ordered revisions to Rule 1.15, MRPC, to take effect on July 1, 2007.  Among the revisions ordered by the Court was the inclusion of a requirement that financial institutions, as an additional condition for approval to maintain lawyer trust accounts, agree to pay a certain minimum level of interest on its Interest on Lawyer Trust Account (“IOLTA”) accounts, i.e., the lawyer trust accounts on which interest is remitted to the Lawyer Trust Account Board.  Specifically, Rule 1.15(o), MRPC, now requires the following:

An approved eligible financial institution must pay no less on IOLTA accounts than (i) the highest earnings rate generally available from the institution to its non-IOLTA customers on each IOLTA account that meets the same minimum balance or other eligibility qualifications, or (ii) 80% of the Federal Funds Target Rate on all its IOLTA accounts.  The rate to be paid shall be fixed on the first day of each month, subject to rate changes during the month reflected in normal month-end calculations.

Revised Rule 1.15, MRPC, also includes a definition of “allowable reasonable fees” that approved financial institutions may charge to IOLTA accounts and a limitation of the source for payment of those fees to the interest earned on the individual IOLTA account, as follows:

 ‘Allowable reasonable fees’ for IOLTA accounts are per check charges, per deposit charges, sweep fees and similar charges assessed against comparable accounts by the eligible financial institution.  All other fees are the responsibility of, and may be charged to, the lawyer maintaining the IOLTA account.  Fees or charges in excess of the earnings accrued on the account for any month or quarter shall not be taken from earnings accrued on other IOLTA accounts or from the principal of the account.  Eligible financial institutions may elect to waive any or all fees on IOLTA accounts.

Various explanatory materials to help you understand and comply with all of the above requirements are attached.

To be approved as an institution in which attorney trust accounts may be maintained, your institution must complete and sign the enclosed Trust Account Overdraft Notification and Interest on Lawyer Trust Account (“IOLTA”) Comparability Agreement and return the original to:

Office of Lawyers Professional Responsibility

Landmark Towers

Suite 1500

345 St. Peter Street

St. Paul, MN  55102

A list of approved institutions appears at this Office’s Internet website www.courts.state.mn.us/lprb.

If you have any questions regarding the reporting of overdrafts on lawyer trust accounts, please call the Director’s Office at (651) 296-3952 or (out-state) 1-800-657-3601, and ask for Cassie Hanson or Lynda Nelson.  If you have any questions regarding IOLTA account comparability, please call Judy Rehak, Senior Legal Counsel, State Court Administrator’s Office, at 651-297-7800.

                                                                                                                  

OVERDRAFT NOTIFICATION

IMPLEMENTATION GUIDELINES

FOR

FINANCIAL INSTITUTIONS

  1. Where are the overdraft notifications sent?

The financial institution should send all trust account overdraft notices to:

Office of Lawyers Professional Responsibility

Landmark Towers

Suite 1500

345 St. Peter Street

St. Paul, MN  55102

  1. Does the rule apply only to IOLTA accounts?

No.  The rule applies to all interest bearing lawyer trust accounts, such as IOLTA accounts, separate trust accounts for particular clients, or pooled accounts with sub-accounting.  Identification of accounts to which the rule applies may be difficult since Minnesota attorneys are not presently required to specifically label the applicable accounts as “trust account.”  The financial institution should make reasonable efforts to identify the accounts to which the rule applies.

  1. If the instrument is honored by the financial institution, must the fact that it was presented against insufficient funds still be reported?

Yes.  The rule requires reporting whether or not the financial institution honors the instrument.  Rule 1.15(l).  It is improper for a lawyer to have overdraft privileges or any other arrangement for a personal loan to cover a trust account.  Rule 1.15(a).

  1. Is there an approved report form to be sent to the Director concerning overdrafts?

No.  If an instrument is dishonored a copy of the notice of dishonor customarily sent to the depositor is sufficient.  Rule 1.15(l)(2) sets out a list of specific items to be furnished to the Director when an instrument is presented against insufficient funds but is paid by the financial institution.

  1. Must all overdrafts be reported?

Yes, all overdrafts must be reported, irrespective of the cause.  If the financial institution learns that its own error caused the overdraft, it should provide the lawyer with a written explanation that the lawyer can submit to the Director.  As soon as the Director receives the overdraft notice, the attorney will be requested to explain.  Any explanation from the bank will be helpful.

  1. Can financial institutions charge lawyers a fee for providing this notice?

Yes.  The rule does not preclude the financial institution from charging a lawyer or law firm the reasonable cost of producing the notice.  Rule 1.15(n).  Charging fees is a matter of contract between the institution and the depositor.

  1. Must instruments be reported which are returned unpaid due to incompleteness?

No.  Only properly payable instruments under U.C.C. 4-401 need be reported.  Rule 1.15(k).  A check that lacks a signature, for example, is not properly payable.

  1. What is classified as a financial institution?

Banks, savings and loan associations, savings banks, and any other business or person that accepts for deposit funds held in trust by lawyers.  Rule 1.15(o).

  1. What is the policy of the Office of Lawyers Professional Responsibility with respect to financial institutions that occasionally fail to report overdrafts through error?

Occasional negligence in failing to report to the Director will not cause removal from the list of approved institutions.  However, a pattern of neglect or bad faith in not complying with the rule may cause the Director to revoke approval.

                                                                                                                       

IOLTA Program Changes:

Information for Minnesota Financial Institutions

On December 21, 2006, the Minnesota Supreme Court issued amendments to the IOLTA rule which primarily update the interest or dividend rate provisions under Rule 1.15 of the Minnesota Rules of Professional Conduct to allow higher rate products for qualifying IOLTA accounts.  The amendment provides that the financial institution pay (i)no less on IOLTA accounts than the highest earnings rate generally available from the institution to its non-IOLTA customers on each IOLTA account that meets the same minimum balance or other eligibility qualifications or (ii) 80% of the Federal Funds Target Rate on all of its IOLTA accounts.  Financial institutions do not have to create new products if the higher rate products are not already available to their other customers. A number of IOLTA programs in other states have similar rate parity provisions.  

In addition the amendments clarify that service charges on an individual account may be netted against the interest only on that account.

Participation in IOLTA remains voluntary for financial institutions, but a lawyer may not keep an IOLTA account at a financial institution that does not participate or meet IOLTA requirements.

Documents Required.  IOLTA forms currently on file for existing accounts remain in effect.  For affected accounts, LTAB will work with banks when additional forms or standard documents for higher rate products may need to be signed.  A new remittance form providing the required information regarding account balances and interest and dividend rates will be used; a number of banks are providing this information already.

Brief Explanation of Changes

Permits the use of government money market funds for IOLTA accounts. The rule authorizes the use of sweep options for IOLTA accounts, where appropriate.  However, the use of sweep options for IOLTA accounts is not required if the financial institution does not offer sweep accounts to other customers or the institution chooses to simply pay the sweep or other applicable product rates (e.g., through the use of tiered rates) on existing IOLTA interest-bearing accounts instead of setting up sweep products for IOLTA accounts. Benefits of this approach may include ease of administration and the option to keep IOLTA funds on their bank's operations balance sheet.  Due to minimum balance requirements, the sweep option is only available to accounts identified by the eligible institution.

Defines institutions that may hold IOLTA funds as banks, savings and loan associations, or open-end investment companies that pay qualifying IOLTA accounts the highest interest rates generally available at their own institution to non-IOLTA customers with comparable balances.

More clearly defines allowable fees which may be assessed against the interest or dividends earned on an individual IOLTA account; any other fees are the responsibility of the lawyer account holder. Fees which may be deducted from interest or dividends on an IOLTA account include per check charges, per deposit charges, a fee in lieu of a minimum balance, federal deposit insurance fees, sweep fees and a reasonable administrative or maintenance fee. However, financial institutions are encouraged to continue their practice which includes waiver of all fees on IOLTA accounts to provide more funding for the IOLTA charitable purposes.

Lists remittance information to be reported to LTAB and provides for a report to the lawyer or law firm in accordance with normal procedures for reporting to depositors. In addition to the account number, the information to be reported to LTAB (shown on the revised IOLTA_Remittance Form) includes the name of the lawyer or law firm, the amount of the remittance attributable to each account maintained by each lawyer or law firm, the rate and type of interest or dividends applied, the amount of interest or dividends earned, the amount and type of fees deducted, if any, and the average account balance for the period for which the report is made.

MORE INFORMATION OR QUESTIONS:  Call the Lawyer Trust Account Board at 651- 297-7800.