` March 29, 1999
Mr. Irving Jacobson
Dear Mr. Jacobson:
You have asked whether it is permissible for a federal credit
union's (FCU's) board of directors to approve payment of a bonus
dividend on regular share accounts only. You do not object to
the payment of a bonus dividend but the fact that it was only
paid on regular share accounts. An FCU's board of directors has
the discretion to declare such a bonus dividend.
The Federal Credit Union Act (the Act) and our regulations grant
an FCU's board of directors broad discretion to establish the
terms, conditions and dividend rates on share accounts. 12 U.S.C.
§§1757(6); 1763, 12 C.F.R. §701.35(a). While an
FCU's board of directors has wide latitude, we expect there to
be a rational basis for distinguishing between types of accounts.
Enclosed is a copy of a letter from me to Anita Geiser, dated September 1997, that discusses the permissibility of bonus dividends and the fact that a board of directors may pay different dividend rates on different types of share accounts, for example, regular share accounts as opposed to share certificates. Also enclosed is a copy of a letter from Hattie M. Ulan to Robert Bascom, dated November 16, 1990, that provides additional discussion on the payment of dividends on shares that you may find helpful.
In your letter, you state you were concerned about a bonus dividend
that your FCU paid only on regular share accounts because it particularly
benefited one of the members of the board of directors who had
substantial shares in a regular share account. The same bonus
dividend rate was applied to all funds in all members' regular
share accounts. The rationale provided to you for declaring the
bonus dividend only on regular share accounts was that the share
certificate accounts already were receiving a higher rate of interest
than regular share accounts. Our view is that this distinction
provides a rational basis for the board's decision.
You also asked what action you or a group of members could take
about the board's decision to pay a bonus dividend in the way
that it did. Because we do not find any apparent violation of
the Act or our regulations, you may
Mr. Irving Jacobson
Page Two
communicate your views about the appropriateness of the decision
to the members of the board informally, which it appears you have
already done, or you may exercise your right to influence the
management of your FCU through the elective process.
Sincerely,
Sheila A. Albin
Associate General Counsel
OGC/DMS/SAA:bhs
SSIC 3500
99-0146
Enclosures
Anita Gieser, President
Pepto Makers Federal Credit Union
P.O. Box 2468
Greenville, South Carolina 29602
You have written asking whether it is legally permissible for
Pepto Makers Federal Credit Union (Pepto) to distribute retained
earnings to its members based on an equal distribution or on length
of membership. As explained below, the answer is no.
Pepto is merging with Greenville Federal Credit Union (Greenville).
The merger agreement provides that Pepto transfer all of its
share accounts, accounts receivable, assets and reserves with
the exception of $37,500 in retained earnings to Greenville.
The Pepto board of directors wants to distribute the $37,500 to
the members based on their length of membership. As an alternative,
the board would like to make an equal distribution to the members,
regardless of their amount of shares. The board has been advised
by the NCUA examiner that the proposed distribution plans are
impermissible.
The Federal Credit Union Act authorizes the board to declare dividends
on share accounts. 12 U.S.C. §1763. Different types of
shares may receive different dividend rates, for example, share
certificates as opposed to regular share accounts, but there is
no authority to pay dividends based on length of membership.
Id. The NCUA rules specifically provide for a bonus dividend
and the permissible methods of payment. 12 C.F.R. §§707.2(m)
and 707.7. Payments are to be based on the member's principal
balance. 12 C.F.R. §707.7(a)(1) and (2). There is no authority
to pay dividends based on length of membership or per capita.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/MFR:bhs
SSIC 3000
97-0813
cc: Region III