Bonus Dividends

Mr. Irving Jacobson

Re: Bonus Dividends, Your Letter dated January 24, 1999.

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 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.