PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Amendment of section 7000.9(b)(1) of Title 21 NYCRR.

An IOLA account interest rate option.

Revise an IOLA account interest rate option to ensure that the account yields highest income to the IOLA Fund.

Section 7000.9 Interest and dividends.

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(b) As alternatives to the foregoing, the institution requesting designation by the trustees of an account as eligible to accept the deposit of IOLA funds may offer:

(1) The greater of 60% of the Federal Funds Target Rate or 1%, paid on an interest-bearing checking account; or

(2) A yeild specified by the IOLA fund, if it so chooses, which is agreed to by the financial institution and would be in effect for a period to be mutually agreed upon.

Stephen G. Brooks, Esq., General Counsel, Interest on Lawyer Account Fund, 11 East 44th Street, New York, NY 10017, (646) 865-1541, email: [email protected]

Same as above.

45 days after publication of this notice.

1. Statutory Authority:

The Interest on Lawyer Account’s Board of Trustees (Board) is authorized to adopt rules for the administration of the Interest on Lawyer Account Fund (Fund) pursuant to State Finance Law (SFL) § 97-v and Judiciary Law (Jud. L) § 497. SFL 97-v(3)(d) authorizes the Board to adopt rules for the “administration of the IOLA Fund to carry out the purposes and provisions of this section and of section four hundred ninety-seven of the judiciary law.” Jud. L § 497(6)(b) requires attorneys to deposit certain client funds into an IOLA account for which the banking institution pays an interest rate not less than the rate paid on “similar accounts” and which does not impose charges or fees greater than those imposed on such “similar accounts.”

Rule 1.15 of the Rules of Professional Conduct provides that “A lawyer in possession of any funds or other property belonging to another person, where such possession is incident to his or her practice of law, is a fiduciary, and must not misappropriate such funds or property or commingle such funds or property with his or her own.” The rule further provides guidance for the maintenance of client funds in an account separate from the lawyer’s business or personal accounts, as well as the requisite record keeping for such accounts. Jud. L § § 497(2-a) similarly provides that funds received by an attorney from a client in the course of his or her practice of law are “funds received in a fiduciary capacity.” Jud. L § 497(2) provides that certain funds received in a fiduciary capacity may, in the judgment of the lawyer, be deemed “qualified funds” to be deposited in an IOLA account.

In addition, Rule 6.1 of the Rules of Professional Conduct embodies the long-standing philosophy that lawyers should help to ensure that every person in our society has ready access to independent legal services by encouraging lawyers to provide pro bono legal services to poor persons and contribute financially to organizations that provide legal services to poor persons. The Fund’s revenue, derived solely from lawyers’ IOLA accounts, also furthers this philosophy by providing financial support in the form of grants to legal services organizations throughout the State, including those that facilitate the delivery of pro bono legal services.

2. Legislative Objectives:

Created in 1983, the IOLA program requires an attorney to open an IOLA bank account to deposit nominal or short term funds held by the attorney on behalf of a client or third party. This means that funds that would otherwise generate no net interest can be pooled to generate interest income. The bank then sends the interest earned, net of charges and fees, to the IOLA Fund.

The money is used to provide funding through grants and contracts to not-for-profit entities that are engaged or assist in the delivery of civil legal services to the poor, and the improvement of the administration of justice.

3. Needs and Benefits:

The proposed rule furthers the legislative objectives of the Fund by establishing a floor under an interest rate option that enables banks to adjust their IOLA interest rate whenever the Federal Reserve changes its “Federal Funds Target Rate.” Thus, the bank need not change its IOLA rate each time it adjusts the rate on similar non-IOLA accounts. This option provides administrative convenience to banks while virtually ensuring that, under current economic conditions, use of the Target Rate option would not result in an interest rate lower than that which the bank set for similar accounts. Use of the option is subject to approval by the Fund.

The proposed rule may result in additional interest payments to the Fund, partially addressing the sharp reduction of interest rates during late 2008 and continuing into 2009. The banks that hold the largest amount of IOLA deposits currently pay a weighted average interest rate of.26%. Should a sufficient number of banks choose to set their interest rates pursuant to the proposed rule, the Fund’s income could increase significantly. Estimating the amount of any increase is inherently speculatively and cannot be performed reliably.

4. Costs:

Account management, recordkeeping and reporting costs have not been assessed by banks to the Fund in the past, except for routine fees and charges typically applied to retail accounts. The higher interest rate resulting from the proposed rule will have no impact on banks, unless they opt to set rates under it. The rule will have no impact on the Fund’s costs.

5. Local Government Mandates:

Local governments are not affected by the proposed rule.

6. Paperwork/Reporting Requirements:

No additional paperwork will be required of attorneys to open or maintain IOLA accounts. Under existing rules, attorneys and law firms must notify the IOLA Fund within 30 days after establishing an IOLA account and provide certain identifying information. These requirements will continue.

All participating financial institutions (199 currently) will continue to report, in the form and manner prescribed by the Fund. The Fund is in the process of eliminating the use of paper for reports filed by banks and substituting electronic reporting. The change should be complete by late summer 2009.

7. Duplication:

The proposed rule does not duplicate existing State or Federal requirements. It is comparable to rules recently adopted in other states.

8. Alternatives:

An alternative would be to make no changes to the existing rule. However, this alternative was rejected, because the goals of the proposed amendment are (1) to enable the Fund to enforce its existing statute and receive increased revenue from IOLA accounts to increase the availability of high quality civil legal services for the poor and (2) continue to offer to banks an interest rate option that is administratively convenient. Maintaining the status quo would not serve those goals.

To perform outreach before the proposed regulatory amendment is published in the State Register, the Fund wrote to a trade association and institutions holding 70% of the monies in all IOLA accounts, informing them of the Fund's intention. A few letters resulted in follow-up conversations. In no conversation did an institution's representative express opposition to the proposal. No written opposition was received.

9. Federal Standards:

The proposed rule does not exceed any minimum standards of the Federal government. The Federal government does not regulate IOLA accounts, as such.

10. Compliance Schedule:

Attorneys and law firms are currently required by existing regulation to maintain IOLA accounts for client funds. There are no changes to the requirement to maintain IOLA accounts, or to prepare certain paperwork or maintain certain records. Attorneys are not involved in setting bank interest rates. Therefore, attorneys and law firms will not be required to take any steps in regard to the proposed rule upon its adoption.

Financial institutions must provide to the IOLA Fund information that demonstrates compliancewith regulatory requirements on a continuing basis. The proposed rule will not affect such reporting.

1. Effect of Rule:

The rule will affect all banks in that it would change an interest rate option available to them, subject to the IOLA Fund’s approval. The banks include those that could be considered small banking institutions because they have assets of less than $1 billion. As of March 31, 2009 there were 154 such institutions in the State.

Under existing regulations, these entities account for and remit to the IOLA Fund at least quarterly the interest earned on IOLA accounts. The proposed rule has no effect on that requirement.

Attorneys and law firms will not be affected by the rule, including those with fewer than 100 full time employees.

2. Compliance Requirements:

The proposed rule modifies an interest rate setting rule that is optional for banking institutions. If chosen, it has no effect on existing reporting and remitting compliance requirements. As indicated, banking institutions would continue to account for and remit to the IOLA Fund at least quarterly the interest earned on IOLA accounts maintained by such bank branch.

Existing regulations require attorneys to notify the IOLA fund within 30 days of establishing an IOLA account of the account number and name and address of the banking institution where the account has been established. If an attorney or law firm currently maintains an IOLA account at a banking institution that for whatever reason no longer offered IOLA accounts or an attorney or law firm established a new IOLA account, such information would have to be provided to the IOLA Fund within 30 days of relocating or establishing the IOLA account. The proposed rule has no effect on these requirements. The number of law firms with fewer than 100 FTEs is unknown.

3. Professional Requirements:

The regulations would not require the hiring of additional staff or independent professionals. No special expertise would be necessary for an attorney or law firm to provide the notification of the establishment of an IOLA account. Banking institutions already must account for the interest to be collected and paid on IOLA. Therefore, it is anticipated that no additional employees or professionals would need to be hired to comply with the proposed rule.

4. Compliance Costs:

No significant compliance costs would result from the proposed rule.

5. Economic and Technological Feasibility:

The proposed rule will not impose additional economic or technological burdens on banking institutions, attorneys or law firms.

6. Minimizing Adverse Impact:

There are no significant adverse impacts anticipated from the proposed rule.

7. Small Business and Local Government Participation:

Small businesses and local government would not be affected by the proposed rule.

1. Types and estimated number of rural areas:

There are 70 banking institutions that collectively have 981 branches located in 44 rural counties of the State. The number of law firms located in rural areas cannot with any reasonable certainty be determined.

2. Reporting, recordkeeping and other compliance requirements; and professional services:

All banking institutions, including those banks with branches located in rural areas, account for and remit to the IOLA fund at least quarterly the interest earned on IOLA accounts maintained by such banks. Attorneys must notify the IOLA fund within 30 days of establishing an IOLA account of the account number and name and address of the banking institution where the account has been established. The proposed regulation makes no change to these requirements.

3. Costs:

No significant compliance costs would result from the proposed rule.

4. Minimizing adverse impact:

There are no adverse impacts anticipated from the proposed rule.

5. Rural area participation:

There are no unique rural effects of the proposed rule and no significant impacts anticipated.

The proposed rule will not have a substantial adverse impact on jobs and employment opportunities. The proposed rule would revise a standard concerning the interest rates paid on IOLA Accounts. This change would have no impact on the creation or retention of jobs or employment opportunities in the State.