4000 - Advisory Opinions
Insurance Coverage of Interest on Lawyer Trust Accounts ("IOLTAs")
May 12, 1992
Mark A. Mellon, Attorney
This is in response to your letter of April 15, 1992. Your letter was referred to the Legal Division for response by the FDIC Office of Consumer Affairs.
Based on your letter, it is my understanding that you wish to ascertain the amount of deposit insurance coverage which is available for an Interest on Lawyer Trust Account ("IOLTA") under our regulations. IOLTA programs have been established by a number of states. Under such a program, lawyers who hold customer funds on deposit must place the funds in interest-bearing accounts. The interest on the funds is to be paid to an entity (generally the state bar association) that is exempt from tax pursuant to section 501(c)(3) of the Internal Revenue Code; the interest so paid is used for certain charitable purposes specified by state law.
The FDIC insurance regulations state that the deposit account records of an insured depository institution must disclose the existence of any fiduciary relationship before any claim for deposit insurance based on that relationship will be recognized. 12 C.F.R. § 330.4(b)(1). If the deposit account records of the insured depository institution do disclose the existence of a fiduciary relationship, the details of the relationship and the interests of the other parties in the account can then be determined either from the deposit account records of the insured depository institution or from the records of the fiduciary, the nominal depositor (or some person or entity whom the fiduciary has engaged to perform that task). 12 C.F.R. § 330.4(b)(2).
An IOLTA account must therefore disclose that the funds in the account are held by the nominal accountholder (the lawyer) on the behalf of others. If this disclosure requirement is met, the FDIC will then be able to ascertain the interests of other parties in the IOLTA account from the records of the insured depository institution or from the records of the lawyer (or from some person or entity whom the lawyer has engaged to perform that task). If this recordkeeping requirement is satisfied, funds attributable to each client will be insured to the client in whatever right and capacity that the client owns those funds. For example, if an IOLTA account contains funds that belong to an individual, they will be insured up to $100,000 as individual funds. These funds will be aggregated and insured to the statutory limit, however, with any other funds which the client may hold individually at the same insured depository institution. The accrued interest which is attributable to the tax-exempt entity will also be recognized as a separately insured interest if the disclosure and recordkeeping requirements are met.
I hope that this answer is responsive to your query. Please do not hesitate to contact me if you should have any questions about this or any other matter.