December 01, 2016

FDIC issues final deposit insurance rule that protects confidentiality of law firm client trust accounts

The Federal Deposit Insurance Corporation (FDIC) issued a final rule this month that includes ABA-supported language exempting law firm client trust accounts, including Interest on Lawyers’ Trust Accounts (IOLTAs), from the new rule’s enhanced recordkeeping requirements.

The final rule, Recordkeeping for Timely Deposit Insurance Determination, requires the largest U.S. banks with two million or more depository accounts to collect and maintain extensive information regarding their depositors’ accounts to ensure that the FDIC can provide the depositors with prompt access to their insured funds in the event of a bank failure. As originally proposed, the rule would have expanded the banks’ recordkeeping duties to all account holders, including law firms and other agents or custodians holding pass-through deposit accounts containing client funds.

In a June 24 comment letter to the FDIC, the ABA praised the agency’s efforts to improve financial institution recordkeeping but expressed concerns that the proposed rule’s enhanced disclosure requirements would impose “unreasonable and excessive burdens on many law firms with client trust fund accounts and undermine both the confidential lawyer-client relationship and traditional state court regulation of lawyers.”

The new proposed requirements, the ABA contended, were also unnecessary in light of lawyers’ existing ethical duties to maintain complete and accurate records regarding client trust accounts and the law firms’ present ability to quickly provide the necessary information to financial institutions and the FDIC in the unlikely event of a large bank failure.

The final FDIC rule published on Dec. 3 does not require law firms to report the identity of their clients – or the amount of funds held in the law firms’ client trust accounts for each client – to the bank or the FDIC as originally proposed. Instead, law firms will continue to follow the current system by maintaining this confidential client account information in their own files, and will only need to disclose information to the bank or the FDIC if the bank holding the account actually fails.

The new rule’s exemption for law firm client trust accounts is consistent with similar client confidentiality language that the ABA helped persuade the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to include in its final Customer Due Diligence Rule that was issued in May.

The new FDIC deposit insurance rule becomes effective on April 1, 2017.

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