IOLTA Accounts and FDIC Insurance in Orange County: What Lawyers Need to Know

Even as an attorney in compliance with California’s Rule 1.15 and CTAPP, some things could affect held clients' funds outside the attorney's direct control. One such example is a bank closure. This can be unforeseen and often unfortunate. If you reconcile and record-keeping IOLTA and client trust accounts the way you're supposed to, is there even a way to predict something like that? Possibly, but that’s a job for financial experts.

For attorneys, consider gaining education about FDIC coverage for trust accounts to determine if it’s the right move for your firm. 

Who Is the FDIC? 

The FDIC is an independent agency created by Congress and founded in 1934 during the Great Depression.

At the time, citizens were rushing to withdraw their money as the banks were closing. Those who did so early were successful. Others lost everything, as the bank only held so much money on the premises. The same is true for today. If a wave of depositors were to rush to the bank to withdraw deposits, the bank would not have enough liquid cash to pay the demand, ultimately leaving many people empty-handed. Congress created the Federal Deposit Insurance Corporation to sustain and boost public confidence in the U.S. financial system through maintaining its stability.

Today, when a bank fails (and is FDIC-insured), the FDIC is there to ensure that depositors do not lose their savings even though the bank itself is insolvent. The funds provided by the FDIC are federally funded to recover funds that the bank did not protect. 

How Does FDIC Insurance Work? 

Banks wanting to be backed by the FDIC can apply to be members. Once approved, the FDIC insurance program reimburses deposits up to a standardized total. The FDIC covers certain deposit products at 100%. These include checking and savings accounts, Money Market Deposit Accounts (MMDAs), and Certificates of Deposits (CDs). 

The FDIC considers trust accounts fiduciary accounts. To receive FDIC coverage for trust accounts, specific requirements must be met for an account. 

• The principal (the party benefiting from the account) must own the funds - The title of the account must disclose its fiduciary nature.
• The principals' identities must be validated using bank deposit records or records maintained by the attorney/fiduciary. 

If the FDIC coverage for trust accounts needs claiming due to a bank failure, the attorney files a claim for their client to the FDIC detailing the account, with client records, documentation, ledgers, etc. 

Keep in mind that clients will not receive the recovered funds directly. These will go to the attorney, who must then disburse within the appropriate time listed by the California Rules of Professional Conduct. 

Are IOLTA Accounts FDIC Insured? 

As of January 2010, IOLTA (Interest on Lawyers’ Trust Accounts) accounts are defined by Business and Professions Code 6213 as an investment product that is:

1. An interest-bearing checking account
2. An investment sweep product that is a financial institution repurchase agreement, an open-end money-market fund
3. An investment product authorized by a California Supreme Court order or ruling. There is strict legislation defining safe investment sweep products.

Sometimes, these are held on the investment side of the bank. For this reason, there are times when the FDIC doesn’t necessarily cover them. 

The banking institution chosen to house IOLTA accounts should be IOLTA-eligible. According to the State Bar of California, an IOLTA-eligible bank pays interest rates to IOLTA customers at rates comparable to similarly situated non-IOLTA customers. This is required under sections 6091.2, 6212, and 6213 of the amended Business and Professions Code, effective January 1, 2008. An attorney will not be permitted to hold their IOLTA at a financial institution that does not meet this requirement.

For a list of IOLTA-Eligible institutions, visit the California State Bar website. 

Ensure the bank chosen is also insured by the FDIC to protect client funds. In most cases, depositors are each insured at $250,000 per account per institution with FDIC-backed banks. Here are some things to note:

• FDIC insurance coverage can differ depending on the type of trust account you are using, specifically regarding IOLTA and non-IOLTA accounts.
• If the funds are held in an interest-building IOLTA account, all the benefits provided by the FDIC apply to client funds so long as the aforementioned fiduciary account stipulations are met.
• In this case, there will be no stipulations on whether the client deposited them or the attorney did so on the client’s behalf. The amount of insurance increases from the standard $250,000 per account to the same amount per client whose funds are held in the account. 

FDIC Limitations 

Even when these stipulations, the FDIC is a limited corporation, meaning there are limitations to what the FDIC may be able to achieve for customers. For example, the FDIC is there to protect clients' money in case of bank failure.

The recovery process, however, may take time. In the meantime, the client’s interests could be adversely impacted.

For example, business opportunities may pass with funds from the folded bank. Further, FDIC insurance on trust accounts doesn’t offer to obtain bank records from the client's trust account or the closed bank.

This is another reason it is mandatory (and practically useful) for attorneys to keep records of all client trust account activity.

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