September 6, 1984
Mr. Steven L. Zinter
Hughes County State's Attorney
Post Office Box 8
Pierre, South Dakota 57501
OFFICIAL OPINION NO. 84-36
Interest-bearing trust accounts
Dear Mr. Zinter:
You have requested an official opinion from this office based upon the following factual situation:
FACTS:
The South Dakota Supreme Court in Supreme Court Rule 84-5 dated January 5, 1984, which became effective on January 1, 1984, amended DR 9-102 of the Code of Professional Responsibility (appendix to SDCL 16-18). Through these amendments, the South Dakota Supreme Court now allows the attorney to voluntarily combine clients' funds which are nominal in amount or are to be held for a short period of time in an interest-bearing trust account with all net interest or dividends from that account to be remitted to the South Dakota Bar Foundation for specifically stated charitable and educational uses. The South Dakota Bar Foundation is a non-profit South Dakota Corporation organized to further various law related charitable and educational functions. Prior to the amendments, South Dakota attorneys maintained clients' funds which were nominal in amount or to be held for a short period of time in a traditional checking or demand deposit account. Under the new amendments, the attorney is given a choice to maintain the above client accounts in a traditional checking or demand deposit account or to create a new interest-bearing trust account with all net interest or dividends going to the South Dakota Bar Foundation.
Based upon the above facts, you have asked the following question:
QUESTION:
Whether the new interest-bearing trust accounts established by Supreme Court Rule 84-5 amendment to DR 9-102 with the payment of interest being made to the South Dakota Bar Foundation would under South Dakota law qualify under 12 U.S.C. Section 1832(a)(2) for deposit in negotiable order of withdrawal accounts (NOW accounts)?
12 U.S.C. Section 1832(a)(2) allows for the establishment of negotiable orders of withdrawal accounts (NOW accounts). The unique feature of a NOW account when compared to a traditional checking or demand deposit account, is the interest or dividends that may be earned from the funds deposited. 12 U.S.C. Section 1832(a)(2), however, imposes certain restrictions on the availability of NOW accounts. 12 U.S.C. Section 1832(a)(2) restricts the availability of NOW accounts to;
'deposits or accounts which consist solely of funds in which the entire beneficial interest is held by one or more individuals or by an organization which is operated primarily for religious, philanthropic, charitable, educational or other similar purposes and which is not operated for profit, and with respect to deposits of public funds . . .'
The issue as to whether the interest-bearing trust account under DR 9-102 as amended would qualify as a NOW account hinges upon the determination of which person or entity holds the beneficial interest in the trust account funds. A legal determination as to the meaning of the term 'entire beneficial interest' for the purpose of 12 U.S.C. Section 1832(a)(2) concerning the interest- bearing trust accounts under DR 9-102 is ultimately the determination of the federal agency charged with its administration, and is beyond the scope of my duties and responsibilities. I can, however, examine the application of the term 'beneficial interest' for the purposes of trust administration under South Dakota law and take this oppotunity to do so.
First, under SDCL 55-1-12, the person for whose benefit a trust is created is called a 'beneficiary.' It is clear from the amendments to DR 9-102 that the South Dakota Bar Foundation is a beneficiary of all the interest or dividends derived from the funds deposited. The South Dakota Bar Foundation has exclusive right to the interest or dividends from the trust funds maintained in the interest-bearing trust accounts.
Neither the lawyers who are voluntarily participating in the program, their clients, nor any other person or entity receives any benefit or has any interest in the incomes derived from these accounts.
Next, though 'beneficial interest,' based upon my research, has not been defined under South Dakota law or by the courts of this State, that term generally has been defined to mean '[p]rofit, benefit, or advantage resulting from a contract, or the ownership of an estate as distinct from the legal ownership or control.' Black's Law Dictionary (Rav. 5th ed. 1979), at 199; see also 5 Words and Phrases, page 439 (1968). Given the fact that under the Amendment DR 9-102, only the South Dakota Bar Foundation receives an advantage or benefit from the establishment of interest-bearing trust accounts over the traditional checking account for client funds that are nominal in amount or held for a short period of time, only the South Dakota Bar Foundation has beneficial interest in the establishment of this type of interest-bearing trust accounts. No other person or entity derives any distinct advantage or benefit.
Based upon the above, it is my conclusion that under South Dakota law the South Dakota Bar Foundation, a nonprofit corporation, holds the entire beneficial interest to the funds deposited in interest-bearing accounts and because it will be using the income derived from those accounts solely for charitable and educational purposes the interest-bearing trust accounts established under the amendments to DR 9-102 would qualify under 12 U.S.C. Section 1832(A)(2) for deposit in NOW accounts.
Respectfully submitted,
Mark V. Meierhenry
Attorney General
