May 26, 2009 – A rule aimed at increasing the amount of interest generated on accounts held by lawyers on behalf of clients or third parties received the qualified backing of the Wisconsin Supreme Court on May 22.

Wisconsin Trust Account Foundation (WisTAF) had petitioned the court for an amendment of SCR 20:1.15, relating to interest paid on IOLTA (Interest on Lawyers Trust Accounts) accounts. WisTAF sought an “interest comparability” rule requiring attorneys to hold IOLTA funds in the account with the highest interest rate that is available to other customers at the financial institution when the IOLTA account meets the same minimum balance and other account qualifications.

Funds in an IOLTA account are nominal amounts or held for a short time and cannot earn income for the benefit of the client or third party in excess of the costs to secure it. WisTAF is the beneficial owner of this interest and disburses the money to finance civil legal services to low-income people.

Earlier this month, the court had considered the interest comparability rule’s potential for unintended consequences regarding lawyers’ increased exposure to risk of loss on the value of these accounts. After further study of this issue, the justices voted four-to-two in favor of the new rule with a stipulation that the State Bar of Wisconsin inquire into the availability of an insurance policy protecting lawyers against the risk of loss. Justice Annette Kingsland Ziegler did not participate.

Still unsatisfied 

Justice Patience Roggensack had initially raised the question of whether this rule change puts a lawyer at risk for losses due to fluctuations in the accounts’ market value. Despite some changes made to address her concerns, Roggensack remained opposed to the rule. She was joined by Justice Michael Gableman in voting against its adoption of the provision allowing the use of sweep accounts.

Roggensack was particularly concerned of the hazards posed by a bank’s use of a “sweep account” to achieve the highest possible return. In a sweep program, a bank automatically sweeps funds above a specified amount in eligible accounts at the close of each business day into an interest-bearing investment, such as a money market mutual fund or overnight repurchase agreement. The next banking day, the customer’s funds, plus interest, are recredited to the deposit account.

If the overnight investments dipped in value, Roggensack said the loss would fall on the lawyer because the lawyer – not the client – agreed to the sweep account.

But Chief Justice Shirley Abrahamson said that sweep accounts are critical to fulfilling the interest-earning purpose of the rule. Of the 24 states that have adopted an “interest comparability” rule, 21 have specifically included a sweep accounts feature and have not reported losses, the court learned.

To reduce whatever risk of loss, the rule had already restricted IOLTA investments to U.S. government securities backed by the full faith and credit of the U.S. government. Moreover, WisTAF had informed the court that most banks in other states have chosen to simply pay a comparable rate rather than actually converting IOLTA accounts in sweep products.

Responding to Roggensack’s concerns, the court agreed to add a comment to the rule to spell out the potential for loss associated with the sweep accounts and the lawyer’s liability for it. But before she could vote for the rule, Roggensack said there had to be some form of insurance policy to protect lawyers against losses.

This precondition would delay the rule’s effective date of Jan. 1, 2010. Weighing the need for the funding to be generated by the rule against the reportedly small risk to lawyers, the court decided it would investigate the possibilities for insurance protections only after it adopted the rule. The court indicated it would approach the State Bar regarding insurance of IOLTA investments as well as federal protections. The court did not specify the identity of a suitable insurer or the financing details of an insurance policy in its discussions of a proposal.

About the petition 

WisTAF submitted the rule petition because, at some banks, lawyers’ trust accounts are not currently treated the same as accounts with similarly large balances. As such, lawyers’ accounts with larger balances have not been considered eligible to use alternatives to an interest-bearing checking account.

“The majority of IOLTA accounts with smaller balances would not change their interest rate or revenue generation,” the petitioners said of the proposed rule’s effect. “Those IOLTA accounts with larger balances, however, would likely generate greater revenue through use of alternative investment vehicles.”

Petitioners noted that the other states that have incorporated interest comparability provisions into their IOLTA rules have seen great gains. Following such a change in Florida, IOLTA income grew 298 percent from June 2004 to June 2006, according to the petitioners.

In a February 2008 analysis, the petitioners forecast up to $1.3 million per year above present IOLTA revenue in Wisconsin under the rule change. This extra income would be used to address a study finding only about 12 percent of Wisconsin’s low-income residents’ civil legal assistance needs are being met satisfactorily due to a lack of money for legal services programs.