` 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

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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