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 interest-bearing IOLTA Account. The result is that funds that would otherwise earn no interest can be put to constructive use.

The lawyer’s bank transfers the interest earned on IOLTA Accounts (‘‘IOLTA Funds’’), no less frequently than quarterly, to the IOLTA Board. The 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?

An ‘‘Enrollment Form for Lawyers and Law Firms’’ can be used to direct the financial institution to open or convert one or more of the lawyer’s Trust Account(s) to interest-bearing 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 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:

(A) the nature of the lawyer’s practice does not require the routine maintenance of a Trust Account in Pennsylvania;

(B) the establishment of an IOLTA Account would work an undue hardship on the lawyer or would be extremely impractical, based either on the geographical distance between the lawyer’s principal office and the closest approved financial institution or on other compelling and necessitous factors;

(C) the lawyer’s historical annual Trust Account experience, based on information from the financial institution in which the lawyer deposits Rule 1.15 Funds, demonstrates the service charges on the Trust Account would significantly and routinely exceed any interest generated.

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, such that sufficient interest income will not be generated to justify the expense of earning interest 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 interest 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, financial 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. A lawyer must determine whether funds of Third Party Owners 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.

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 approved financial 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 rate of interest payable on an IOLTA Account cannot be less than the highest rate or dividend generally available from the financial institution to its non-IOLTA Account customers when the IOLTA Account meets or exceeds the same minimum balance and other account eligibility qualifications. Financial institutions remit the interest at least quarterly to the IOLTA Board.

Financial 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 financial institution shall also provide information regarding the average daily balance in the account.

Where do IOLTA funds go?

Interest 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 IOLTA interest received by the Board attributable to the mistaken deposit, net of an administrative charge, will be made to the lawyer for distribution to the Third Party Owner.

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. However, each lawyer is ultimately responsible to ensure that he or she is in compliance with IOLTA.

Can a lawyer deposit Qualified Funds into a credit union or brokerage account?

Rule 1.15 Funds in IOLTA Accounts, if maintained at credit unions and brokerages, may not be insured. Since all IOLTA Accounts must be insured, only those approved financial institutions which insure IOLTA Accounts can be used as depositories for Qualified Funds. The owner of the Rule 1.15 Funds must qualify for membership in the credit union in order for the funds to be insured.

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 funds of a client or third person 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) benefiting the client or third person; (2) the financial 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(d), as amended in April 2005, specifically excludes funds which the lawyer receives while acting as fiduciary for an estate, trust, guardianship or conservatorship. However, Comment 7 to the Rule, as amended in April, 2005, does state that funds received by a lawyer while serving as an executor or trustee, if nominal in amount or expected to be held for such a short period of time that sufficient interest will not be generated to justify maintaining a segregated account may, in the discretion of the lawyer, be deposited into an IOLTA Account, although such deposit is not required.

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?

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: (i) if a lawyer provides nonlegal services that are not distinct from legal services, (ii) if the lawyer provides nonlegal services that are distinct from legal services, but the lawyer knows or reasonably should know that the recipient might believe that the recipient of the services is receiving the protection of a client-lawyer relationship, or (iii) if the lawyer is a 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 three 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 interest 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 [phone]. The Board’s fax number is [phone].