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Banks opt out of FDIC program to fully insure IOTA accounts.

Some banks are dropping out of a federal program that for the past year has provided unlimited deposit insurance for noninterest bearing transaction accounts and lawyers' IOTA accounts.

For lawyers or law firms, this affects funds held in trust at interest for the client or third party, in IOTA for nominal or short-term funds, or in a noninterest bearing account for funds not eligible for IOTA but not invested for the client or third party.

The Federal Deposit Insurance Corporation, in response to last year's banking and fi nancial crisis, increased depositor protection from $100,000 to $250,000 and also on November 21, 2008, provided unlimited coverage for noninterest bearing transaction and IOTA accounts. All Florida banks participated in that Transaction Account Guarantee (TAG) program.

TAG was one of the steps the federal government took to shore up the banking system during last fall's financial crisis. It had been set to expire as of December 31, 2009, but has been extended until June 30, 2010, for banks participating in the initial program. However, those banks will have to pay higher fees to continue that participation.

The details of the TAG program were outlined in a December 1, 2008, article in the Bar News. (See: www.floridabar. org/DIVCOM/JN/JNNews01.nsf/Articles/ A1DA1E3FBF7E614E85257508007B078A)

A number of large banks operating in Florida have opted out of the extended TAG program and noninterest bearing and IOTA accounts at those banks will not have unlimited coverage starting January 1, 2010. A list of banks that have opted out of the program can be found on the FDIC's Web site at resources/TLGP/optout.html. For multi-state banks, check the state in which the bank is headquartered.


Also, banks must prominently display in their lobby if they are dropping out of the TAG program.

The FDIC still insures up to $250,000 per depositor at banks that have opted out of the extended TAG program. The $250,000 per depositor insurance will be in effect until December 31, 2013. After that, FDIC deposit insurance will revert to the $100,000 per depositor level in place before the financial downturn.

The FDIC insurance is per depositor, not per account. For lawyers, that means the $250,000 applies to each client with funds in a trust account, not to the trust account as a whole. However, if a client has other personal funds on deposit in the same bank in insured accounts, the $250,000 limit applies to the combination of the client's personal and trust account deposits.

Florida Bar ethics rules do not require lawyers to split up client or third-party trust deposits among multiple banks to obtain full FDIC insurance coverage. However, Ethics Opinion 72-37 does specify that lawyers act prudently.

The opinion says, in part, "[I]n handling clients' funds, the lawyer is acting as a fiduciary or trustee and is expected to act as a prudent man. Obviously the size of the deposit should be prudent in relation to the size and reputation of the financial institution where it is placed.

"If there is any reasonable doubt in the mind of the lawyer as to the security of the deposits, it might then become prudent to divide the trust funds and take advantage of FDIC insurance, having due regard to the requirements of DR 9-102 [now Bar Rule 5-1.1(a)(1)]."

Of the 117 failures nationwide in 2008 and through November 20, 2009, only five required FDIC insurance. The remainder had all of their deposits, regardless of size, guaranteed by the bank or banks that took over those institutions.
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Publication:Florida Bar News
Date:Dec 15, 2009
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