The Florida Bar News April 19, 2023

AUTHOR
Mark D. Killian, Editor
The Florida Bar

‘This rule does not compel any bank to offer this interest rate. But by setting this objective standard, every lawyer has a goal that the Bar maintains is achievable. These lawyers will now negotiate more aggressively to achieve what the Bar maintains is the fair market price.’

Better funding for necessary legal services for low-income Floridians is a goal worth pursuing and a new Bar rule requiring lawyers to keep their trust accounts in institutions that tie interest rates for IOTA accounts to specific indexed rate points is a free market approach to achieving that goal.

That was The Florida Bar’s response to a motion for rehearing filed by the Florida Bankers Association (FBA) in Case No. SC22-1292 decided March 16 and slated to take effect May 15.

While not participating in the rulemaking process, the FBA contends they were not given adequate notice of the proposed amendments, that the changes will have “real world, negative impact and risk of harm to Florida’s banks and law firms,” and the IOTA rule amendment is preempted by federal law and impermissibly encroaches on the executive branch’s authority to regulate the banking industry in Florida. (See story, here.)

In response, the Bar said the amendments to Rule 5-1.1(g) repair the market in which interest rates for IOTA trust accounts are established to make that market closer to the theoretical model of the free market and the FBA has little or no standing to protest the changes and their arguments do not warrant delaying the implementation of the amendments.

Specifically, the new language provides: “When the Wall Street Journal Prime Rate (‘indexed rate’) is between 325 and 499 basis points (3.25% and 4.99%), the yield must be no less than 300 basis points (3.00%) below the indexed rate in effect on the first business day of each month. When the indexed rate is 500 basis points (5.00%) or above, the yield must be no less than 40% of the indexed rate in effect on the first business day of each month.”

The rule change does not “regulate” banks or give the court the power to sanction banks. Instead, the Bar says, the changes are designed to regulate lawyers in the process of opening and maintaining IOTA trust accounts.

“The Bar is seeking to achieve its longstanding goal of obtaining the highest interest rates available in the free market by amending the rule to create a structure that can be successful,” the Bar argued.

The Bar maintains that this minimum rate is within the reasonable range of the fair market price to charge banks to receive the billions of dollars of capital in lawyers’ IOTA trust accounts.

“This rule does not compel any bank to offer this interest rate,” the Bar said. “But by setting this objective standard, every lawyer has a goal that the Bar maintains is achievable. These lawyers will now negotiate more aggressively to achieve what the Bar maintains is the fair market price.”

That, in turn, will provide The Florida Bar Foundation with a larger and more consistent funding source to provide legal services to low-income Floridians.

It is the Bar’s position that this minimum rate is well within the price range that will create an adequate supply of willing bankers to offer trust accounts sufficient to cover the amounts held in those accounts by Florida’s lawyers.

“The Bar is setting its asking price in this regulation and understands there is some risk that the ‘buyers’ on other side of the market might not be willing to pay this amount for some of the $6.5 billion that the FBA explains is the capital for sale to banks at the interest rates established by this rule,” the Bar said. “But the Bar expects that there will be banks willing to compete at these levels.”

The Bar said it also understands that it will take time to implement this rule after it goes into effect and recognizes some lawyers may need to close existing accounts and move those accounts to more competitive banks during the implementation of the rule.

“If the FBA is actually correct in its unsubstantiated, ‘sky- is-falling’ threat that a shift to more competitive interest rates will produce a shortage of banks willing to provide these services, that is an issue that can be addressed if and when it actually occurs,” the Bar said.

A bank that does not believe it can compete at that minimum rate is not compelled to participate, the Bar said, and is free to stay outside the market and allow other banks to participate.

The Bar also asserts it met all the notices requirements of Rule 1-12.1(d) and that Joseph D. Hudgins — a banker with extensive experience who sits as a public member of the Board of Governors and Florida Bar Foundation board and is one of the architects of the rule change — personally discussed the proposed changes with many in the banking industry, including the FBA’s executive vice president.

Neither the FBA, nor any of its members, nor any lawyer representing any bank filed a response to any of the Bar’s published notices, the Bar said.

“The FBA simply wants to continue the flawed market system for as long as it can for the benefit of those of its membership who wish to keep the additional revenue for their banks rather than using it to fund legal services for low-income Floridians,” the Bar said. “The FBA and its members are not offering alternative methods to fix the defects in the market to make it better emulate a classic free market.”

Since the Bar began considering this option more than two years ago, the interest rates banks charge for loans have gone up nearly as fast as the prime rate. The interest rate that many banks pay to valued commercial customers on other accounts has also gone up substantially, according to the brief. But the IOTA accounts have not experienced similar increases in this period. Many of those accounts still earn less than 1%, the Bar said.

If the Bar is incorrect in its assessment that the market will find a sufficient supply of banks willing to receive the funds from these trust accounts by agreeing to a rate well below the prime rate, the Bar admits it may eventually need to reconsider the language of the amendment.

“But for the first time, lawyers will actually have an objective, enforceable rule that will give them the incentive to seek out banks that do offer these rates,” the Bar said. “The Bar remains optimistic that it can achieve the goal set by this rule.”

The court has yet to rule on the FBA’s motion for rehearing.

VIEWS AND CONCLUSIONS EXPRESSED IN ARTICLES HEREIN ARE THOSE OF THE AUTHORS AND NOT NECESSARILY THOSE OF FLORIDA BAR STAFF, OFFICIALS, OR BOARD OF GOVERNORS OF THE FLORIDA BAR.