The Supreme Court of South Carolina
In re: Amendments to Rule 412,
SCACR,
Interest on Lawyer Trust Accounts (IOLTA)
O R D E R
The South Carolina Bar Foundation has proposed amending Rule 412, SCACR, the rule regarding Interest on Lawyer Trust Accounts (IOLTA), to convert the IOLTA program to a mandatory program so as to enhance revenues to fund critical initiatives that support the justice system, [1] to ensure that the rule complies with the United States Supreme Courts holding in Brown v. Legal Foundation of Washington, 538 U.S. 216, 123 S.Ct. 1406, 155 L.Ed.2d 376 (2003), including providing guidance to attorneys on how to determine nominal and short-term deposits and delineating procedures for issuance of refunds when client funds should have been placed in non-IOLTA accounts for the benefit of the client, and to incorporate service fee policies to ensure ongoing compliance by financial institutions. The proposed amendments are approved.
Pursuant to Article V, 4, of the South Carolina Constitution, we hereby amend Rule 412, SCACR, to reflect the changes set forth above. These amendments shall be effective March 1, 2005. A copy of the amended rule is attached.
IT IS SO ORDERED.
| s/Jean H. Toal
C.J. s/James E. Moore J. s/John H. Waller, Jr. J. s/E. C. Burnett, III J. s/Costa M. Pleicones J. |
Columbia, South Carolina
January 6, 2005
[1] These initiatives are related to the three program goals established by the South Carolina Bar Foundation: (1) providing civil legal aid to the poor; (2) offering law-related education; and (3) supporting programs to improve the administration of justice in South Carolina.
RULE
412
INTEREST ON LAWYER TRUST ACCOUNTS (IOLTA)
(a) Definitions. As used herein, the term:
(1) Nominal or short-term describes funds of a client or third person that, pursuant to section (d) below, the lawyer has determined cannot provide a positive net return to the client or third person;
(2) Foundation means the South Carolina Bar Foundation, Inc.;
(3) IOLTA account means an interest bearing trust account benefiting the South Carolina Bar Foundation established in a participating institution for the deposit of nominal or short-term funds of clients or third persons;
(4) Participating Institution means any bank, credit union or savings and loan association authorized by federal or state laws to do business in South Carolina and insured by the Federal Deposit Insurance Corporation or any successor insurance corporation(s) established by federal or state law.
(b) Attorney Participation.
(1) All nominal or short-term funds belonging to clients or third persons that are placed in trust with any member of the South Carolina Bar practicing law from an office or other business location within the state of South Carolina shall be deposited into one or more IOLTA accounts, except as provided in Rule 1.15 of Rule 407, South Carolina Appellate Court Rules, with respect to funds maintained other than in a bank account and as provided in section (i) below.
(2) A law firm of which the lawyer is a member may maintain the account on behalf of any or all lawyers in the firm.
(c) Depository Procedures.
(1) The IOLTA account shall be established with a participating institution. Funds deposited in each IOLTA account shall be subject to withdrawal upon request and without delay, subject only to any notice period which the institution is required or permitted to reserve by law or regulation and as provided in Rule 1.15 regarding safekeeping of client property.
(2) The rate of interest payable on any interest bearing trust account shall not be less than the rate paid by the depository institution on comparable accounts to its non-IOLTA customers when IOLTA accounts meet or exceed the same minimum balance or other eligibility requirements, if any. Higher rates offered by the institution to customers whose deposits exceed certain or quantity minima may be obtained by a lawyer or law firm on some or all of the deposited funds so long as there is no additional impairment of the right to withdraw or transfer principal. Reasonable service charges or fees may be assessed, as provided in section (h) below, only against the interest or dividends generated and not against the principal.
(d) Determination of Nominal or Short-Term Funds.
(1) The lawyer shall exercise good faith judgment in determining upon receipt whether the funds of a client or third person are nominal or short-term. Client funds shall be deposited in a lawyers or law firms IOLTA account unless the funds can otherwise earn income for the client in excess of the costs incurred to secure such income.
In the exercise of this good faith judgment and determining whether a clients funds can earn income in excess of costs and thus provide a positive net return to the client, the lawyer or law firm shall consider the following factors:
(A) the amount of funds to be deposited;
(B) the expected duration of the deposit, including the likelihood of delay in the matter for which the funds are held;
(C) the rates of interest or yield at financial institutions where the funds are to be deposited;
(D) the cost of establishing and administering non-IOLTA accounts for the clients benefit, including service charges, the costs of the lawyers services, and the costs of preparing any tax reports required for income accruing to the clients benefit;
(E) the capability of financial institutions to calculate and pay income to individual clients; and
(F) any other circumstances that affect the ability of the clients funds to earn a net return for the client.
The lawyer or law firm shall review its IOLTA account at reasonable intervals to determine whether changed circumstances require further action with respect to the funds of any client.
(2) The determination of whether a clients or third persons funds are nominal or short-term shall rest in the sound judgment of the lawyer or law firm. No lawyer shall be charged with ethical impropriety based on the exercise of such good faith judgment.
(3) Notification to the client is not required nor shall the client have the power to elect whether nominal or short-term funds shall be placed in the IOLTA account.
(4) The provisions of section (c) shall not relieve a lawyer or law firm from an obligation imposed by Rule 1.15 of the Rules of Professional Conduct with respect to safekeeping of client property.
(e) IOLTA Refund Procedures.
The Foundation will issue refunds when interest has been remitted in error when, pursuant to subsection (d), the funds should have been placed in a non-IOLTA account for the benefit of the client. The Foundation shall establish procedures for the processing of refund requests.
(f) Notice to Foundation.
Lawyers or law firms shall advise the Foundation, at Post Office Box 608, Columbia, SC 29202-0608 or by facsimile at (803) 779-6126, of the establishment and closing of an IOLTA account for funds covered by this rule. Such notice shall include: the name of the institution where the IOLTA account is established; the IOLTA account number as assigned by the institution; the institution address; and the name and South Carolina Bar attorney number of the lawyer, or of each member of the South Carolina Bar in a law firm, practicing from an office or other business location within the state of South Carolina that has established the IOLTA account.
(g) Certification.
Each member shall certify annually on the members license fee statement submitted pursuant to Rule 410, South Carolina Appellate Court Rules, that the member is in compliance with the provisions of this rule or, pursuant to section (i) below, has been approved by the Foundation as exempt from the provisions of this rule.
(h) Remittance and Reporting Instructions.
A lawyer or law firm depositing client funds in an IOLTA account shall direct the depository institution to:
(1) calculate and remit interest or dividends, net of reasonable service charges or fees, on the average monthly balance in the account or as otherwise computed in accordance with the institutions standard accounting practice, monthly to the Foundation, which shall be the sole beneficial owner of the interest or dividends generated by the accounts;
(2) transmit monthly to the Foundation a report, listing by account the name of the lawyer or law firm for whom each remittance is made, the lawyers or law firms IOLTA account number as assigned by the institution, the rate of interest applied, the average account balance for the reporting period or the other amount from which interest or dividends are determined, the amount of each remittance, and the amount of any service charges or fees assessed during the remittance period, and the net amount of interest remitted for the period;
(3) transmit at least quarterly to the depositing lawyer or law firm, a report or statement containing the information required in subsection (2) above.
In the event that a financial institution does not waive service charges or fees on IOLTA accounts, reasonable customary account maintenance fees may be assessed. Fees for wire transfer, insufficient funds, bad checks, stop payment, account reconciliation, negative collected balances and check printing are not considered customary account maintenance charges and may not be assessed against an IOLTA account. Such non-routine fees must be brought to the attention of the lawyer or law firm, who in turn may absorb these specific costs or pass along those fees to the client(s) being served by the transaction (in accordance with attorney/client agreements).
Negative interest earnings resulting from service charges which exceed interest earned are prohibited on IOLTA accounts. Service charges may only be imposed to the extent of interest earned on an individual account.
Participating institutions shall forward the remittance report to the Foundation within 45 days of the end of the reporting period.
(i) Exempt Accounts.
The Foundation will establish procedures for a lawyer or law firm to maintain an interest-free trust account for client and third-person funds that are nominal or short-term when these nominal or short-term funds cannot reasonably be expected to produce or have not produced an interest income net of reasonable participating institution service charges or fees.
(j) Program Administration.
The Foundation shall, in accordance with its charter and by-laws, receive, administer, invest, disburse and separately account for all funds remitted to it through this program.