Florida Bankers Association objects to IOTA rule change pegging interest rates to indexed rate points
Saying it “goes too far, too fast,” the Florida Bankers Association is objecting to a new Bar rule requiring lawyers keep their trust accounts in institutions that tie interest rates for IOTA accounts to specific indexed rate points.
Saying they were not given adequate notice of the proposed amendments to Rule 5-1.1, decided March 16 in Case No. SC22-1292, the Florida Bankers Association (FBA) filed a motion for rehearing March 31 despite not being a party to the case.
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 FBA says the change, slated to take effect May 15, will have “real world, negative impact and risk of harm to Florida’s banks and law firms.”
The FBA also contends the IOTA rule amendment is preempted by federal law and by adopting the rule the judiciary has impermissibly encroached on the executive branch’s authority to regulate the banking industry in Florida.
“While FBA acknowledges that increasing revenue to the Foundation is necessary and appropriate, a sudden, rigid, and mandatory 2,809% increase in interest rates on IOTA accounts is unsafe and unsound,” the FBA said in its motion.
While voluntary for banks, the FBA says law firms must use banks and financial institutions to manage client funds and to participate in the program, banks must comply with the new interest rate requirements.
Because the rates are “prohibitively high,” the FBA said it will likely cause some banks — perhaps even a significant number — to withdraw from the IOTA program.
“In practice, the 2023 IOTA Amendment is tantamount to an effective regulatory policy that is so onerous and so drastic that it creates an unsafe and unsound banking environment, and, therefore, invades the purview of the state and federal regulators (who are charged with regulations that affect the safety and soundness of banks),” the FBA said.
The Florida Bar’s goal in amending the IOTA rule was to increase interest paid on IOTA accounts, and thereby increase funding for The Florida Bar Foundation.
“While the intent behind the 2023 IOTA Amendment is admirable — and the FBA and its members support increasing revenue to the Foundation to further its charitable programs — the Rule as amended goes far beyond its intended purpose,” according to the FBA. “Indeed, at the current Prime Rate of 8.0%, the corresponding IOTA rate under the 2023 IOTA Amendment on its effective date will be 3.2%, an approximate 2,809% increase from the current average rate paid on IOTA accounts of 11%.”
That “unprecedented surge in interest rates” — as applied to the approximate $6.5 billion in Florida IOTA accounts — will result in revenue to the Foundation of $208 million, according to the FBA.
“Certainly, FBA and its member banks understand that low interest rates have contributed to extremely depressed revenue for the Foundation, which has left it struggling to fund its much-needed programs,” the FBA said. “But increasing the annual income to the Foundation from approximately $7,150,000 to $208,000,000 in a single year is unconscionable, de-stabilizing, and, in all likelihood, significantly beyond the expectations of the Foundation when the 2023 IOTA Amendment was originally proposed. Thus, the 2023 IOTA Amendment raises grave concerns, including the practical and perhaps unintended consequences the Rule will have on FBA members, law firms, and an already stressed banking industry.”
The FBA is asking the court “to waive the timely comment requirement, and excuse FBA’s inadvertent misstep in failing to promptly submit comments to the Board of Governors or the Court, or to otherwise appear in the underlying proceedings” and vacate its opinion based on the due process and constitutional violations, or, at a minimum, suspend the effective date of the amended rule until the court has meaningfully addressed the FBA’s challenges.
The May 15 effective date, the FBA says, fails to provide institutions participating in the IOTA program with reasonable time to determine whether they can feasibly comply with the rule, if they so choose, or to otherwise divest their IOTA accounts and provide law firms with enough time and notice to seek another depository institution. The FBA notes the court in the past has permitted institutions at least six months to comply with IOTA changes.
The FBA says the expected consequence of a mandatory 309 basis-points increase in rates is that, to remain profitable, banks will have to charge its law firm customers for the transaction costs associated with an IOTA account.
“The practical effect of those increased costs is unknown and cannot be properly measured without significant study of the effect of the 2023 IOTA Amendment,” according to the FBA.
“Indeed, regardless of the perception that banks have had a ‘free lunch’ on IOTA accounts, which they dispute, mandating disproportionately high interest rates will naturally cause the shareholders of banks and financial institutions to seriously consider whether they should continue to accept IOTA accounts at all,” the FBA said. “A decrease in participating institutions will cause instability for Florida law firms and their clients’ funds as lawyers scramble to find banks willing to hold IOTA accounts under the 2023 IOTA Amendment.
“For the foregoing reasons, the Florida Bankers Association respectfully requests that the Court deem its comments and motion for rehearing properly and timely filed, and, alternatively, consider its motion for leave to appear as amicus on rehearing as properly and timely filed; grant rehearing and vacate its Opinion adopting the 2023 IOTA Amendment, or suspend the effective date, and give the FBA an opportunity to be heard and to submit comments to the Court; or, otherwise in the alternative, provide IOTA participants, including FBA members, with a reasonable time period of no less than six months to comply with the 2023 IOTA Amendment, or to transition from the IOTA program.”
The court has yet to rule on the motion for rehearing.