Issuance of a Preferred Stock Dividend by the Federal Home Loan Mortgage Corporation ( 1985 )

Issuance of a Preferred Stock Dividend
by the Federal Home Loan Mortgage Corporation
The Federal Home Loan M ortgage C orporation is authorized, under 12 U S.C. § 1 4 5 5 (0 .to *ssue
a dividend o f preferred stock to its shareholders, the Federal Home Loan Banks. The Federal
Home Loan Banks are further authorized to distribute that stock as a dividend to their
shareholders.
January 25, 1985
M em orandum O p in io n f o r t h e C o un sel to the D ir e c t o r ,
O f f ic e of m anagem ent and Budget, and the C h a ir m a n ,
F ederal H om e Loan Bank B oard
This responds to the request of the Counsel to the Director, Office of
Management and Budget (OMB), for the opinion of this Office concerning the
issuance by the Federal Home Loan Mortgage Corporation (FHLMC) of a
preferred stock dividend to its shareholders, the twelve Federal Home Loan
Banks (FHL Banks).
OMB contends that the preferred stock dividend was unlawful because the
FHLMC is statutorily authorized only to sell preferred stock and not to issue a
preferred stock dividend. In contrast, the FHLMC and the Federal Home Loan
Bank Board take the position that the preferred stock dividend should be
considered as two separate transactions, the preferred stock dividend from the
FHLMC to the FHL Banks, and the separate dividend of this FHLMC preferred
stock declared by the FHL Banks to their shareholders. The FHLMC argues
that each of these transactions was permissible under the applicable statutes.
The FHLMC’s outside counsel has also taken the position that the transaction
was authorized by statute.
We conclude that the FHLMC’s analysis is correct, and that the FHLMC was
statutorily authorized to issue the preferred stock and to distribute it as a stock
dividend.1 We are aware of no facts or legal authorities that even remotely
support the conclusion that the preferred stock transaction was unlawful.
1 W e take no position w ith respect to w hether the FHLMC w as financially in a position to pay such a
dividend. That factual question is beyond the expertise o f this O ffice and, in any case, w e do not understand
that this issue has been raised as a question o f either fact o r law.
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I. Background
The FHLMC is a corporate instrumentality of the United States created by
the Federal Home Loan Mortgage Corporation Act (FHLMC Act), 12 U.S.C.
§§ 1451-1459. The FHLMC was established primarily for the purpose of
increasing the availability of mortgage credit for housing by assisting in the
development of secondary markets for conventional mortgages, which in turn
increases the liquidity of residential mortgage investments. The FHLMC car­
ries out this task principally through the purchase of first lien, conventional
residential mortgages from mortgage lending institutions and the resale of
these mortgages in the form of guaranteed mortgage securities.
The FHLMC is governed by a Board of Directors that consists of the
members of the Bank Board, who also have responsibility for overseeing the
Federal Savings and Loan Insurance Corporation. See id. § 1452(a). The FHL
Banks provided the FHLMC’s initial capital of $100 million and now own all
of the FHLMC’s common stock. See id. § 1453. Since 1981, the Board of
Directors of the FHLMC has paid cash dividends periodically to the FHL
Banks. The FHL Banks are all separate corporate instrumentalities of the
United States, which were created pursuant to the Federal Home Loan Bank
Act, id. §§ 1421-1436. Each FHL Bank is governed by a board of directors, the
majority of which is elected by the FHL Bank stockholders, with the remainder
being appointed by the Bank Board. See id. § 1427. The stockholders of each
FHL Bank are various financial institutions (principally savings and loan
associations) that have subscribed for and own stock in that FHL Bank. See id.
§ 1426.
We understand that the FHL Banks historically have paid dividends to their
stockholders in the form of both cash and shares of stock in the FHL Bank. See
12 C.F.R. § 522.6. We also understand that cash dividends paid by the FHLMC
to the FHL Banks generally have been passed through by each FHL Bank to its
stockholders. The transaction at issue was initiated when the Board of Direc­
tors of the FHLMC adopted resolutions creating the preferred stock and autho­
rizing the issuance and distribution of the preferred stock to the FHL Banks in
proportion to their respective holdings of the FHLMC’s common stock. In
December 1984, each FHL Bank declared a dividend, consisting of the shares
of the preferred stock issued to that FHL Bank, to its members of record as of
the close of business on December 31, 1984. These FHL Bank dividends were
subsequently approved by a resolution of the Bank Board.
II. Analysis
We concur with the position of the FHLMC that the question presented
raises two separate legal issues: (1) whether the FHLMC was statutorily
authorized to issue a preferred stock dividend to the FHL Banks; and (2)
whether the FHL Banks were authorized to pass this preferred stock on as a
dividend to their shareholders.
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A. The Validity o f the FHLMC Preferred Stock Dividend
OMB does not dispute that the FHLMC is statutorily authorized to issue
dividends to the holders of its common stock.2 See 12 U.S.C. § 1453(d). Thus,
the only question is whether the dividend may be in the form of preferred stock.
Both OMB and the FHLMC agree that the only directly relevant statutory
authority with respect to the first issue is contained in 12 U.S.C. § 1455(f).3
This section was added to the FHLMC Act in 1982 as § 6 of an act that
extended a number of federal housing programs. See Pub. L. No. 97-289, § 6,
98 Stat. 1230, 1232 (1982 Act). In 1984, further language was added to this
provision by § 211 of the Secondary Mortgage Market Enhancement Act of
1984. See Pub. L. No. 89^40, § 211, 98 Stat. 1689, 1697 (1984 Act). These
enactments will be considered separately below.
1. The 1982 Act
As originally enacted, § 1455(f) read: “The Corporation may have preferred
stock under such terms and conditions as the Board of Directors shall prescribe.
Any preferred stock shall not affect the status of the capital stock issued under
§ 1453 as nonvoting common stock.” This statute sets forth a broad and
unambiguous delegation of authority to the Board of Directors of the FHLMC
to issue preferred stock “on such terms and conditions as the Board of Directors
shall prescribe.” There is no restriction stated in the statute on what the
FHLMC may do with the preferred stock once it is issued.4 Given this broad
statutory power granted to the FHLMC by § 1455(f) with respect to the
issuance of preferred stock, and its subsequent disposition, there seems to be
ample power to issue the preferred stock in the form of a dividend to holders of
its common stock, as the FHLMC has done in this case.
This conclusion is supported by the general rule that the issuance of stock
dividends is generally within the power of a corporation:
In the absence of a constitutional or statutory prohibition, if the
directors of the corporation, acting in good faith, are of the
opinion that it is for the best interests of the corporation and its
stockholders to retain profits in the business of the corporation,
or as a surplus fund to meet future needs, instead of dividing
them among the stockholders as a dividend in cash or property,
it is within their discretion to do so and to pay a dividend by
issuing reserved or additional stock.
2 In fact, OMB urges the paym ent in these circum stances o f a cash dividend instead o f a stock dividend.
3 W e note that the FHLMC A ct states that, except as otherw ise provided by the Act or by subsequent laws
“expressly in lim itation o f the provisions" o f the Act, “the pow ers and functions of the C orporation and o f the
B oard o f D irectors shall be exercisable, and the provisions o f this chapter shall be applicable and effective,
w ithout regard to any other law.*' Id. § 14S9.
4 OM B takes the position that “ [t]he issue is not the legality o f having such stock outstanding — w e fully
concede this; the issue, rather, is the terms and conditions upon which such stock may be issued.” OMB
further concedes that § 1455(0 authorizes the FHLMC to sell the preferred stock to the public, notw ithstand­
ing that the statute does not specifically discuss what the FHLM C may d o w ith the stock once it is issued.
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11 M. Wolf, Fletcher Cyclopedia o f the Law o f Private Corporations § 5360, at
742 (1971) (footnote omitted).
Despite the apparent clarity o f this statutory authorization, OMB contends
that the legislative history of the 1982 Act demonstrates that the provision was
not intended to authorize a preferred stock dividend. OMB points to the
remarks of Representative Gonzalez, who made the following statement on the
floor of the House with respect to the provision that became § 1455(f):
The resolution would also provide the Federal Home Loan
Mortgage Corporation with the authority to issue preferred stock.
The intent of this provision is to enable the Mortgage Corpora­
tion to contribute to a housing recovery by allowing it to in­
crease its purchases of newly originated mortgages during the
hoped for housing recovery in 1983. It will also enable the
Mortgage Corporation to continue its highly successful SWAP
Program at current volume levels should this need continue.
128 Cong. Rec. 25946 (1982). OMB argues that this statement demonstrates
that the preferred stock provision was enacted only for the purpose of raising
capital and therefore that preferred stock may only be sold and not issued as a
dividend. We disagree with this conclusion for a number of reasons.
First, a fair reading of Representative Gonzalez’s statement does not neces­
sarily support the conclusion for which it has been cited by OMB. Representa­
tive Gonzalez simply stated that raising or preserving capital was the principal
purpose for which the provision was adopted; his statement does not evince an
affirmative intent to deny the authority to issue preferred stock for other
reasons. It is frequently the case that a statute enacted for a particular purpose
or to meet a particular need is subsequently utilized for additional purposes
because of its broad language. See 2A C. Sands, Sutherland Statutory Con­
struction § 49.02 (3d ed. 1973). Thus, the mere description of this provision’s
principal purpose does not limit its use to that purpose, in contravention of the
clearly applicable broad language of the statute itself.
Second, even if Representative Gonzalez’s statement supported the restric­
tion of the broad language of the statutory authorization to the purpose of
raising or preserving capital, the declaration of a preferred stock dividend
would not necessarily be inconsistent with such a purpose. Given the decision
of the Board of Directors to issue some form of dividend, the logical alternative
to a stock dividend would have been a cash dividend. In fact, the issuance of a
cash dividend is precisely the alternative that OMB recommends that the
FHLMC adopt. By issuing a dividend of preferred stock rather than cash, the
FHLMC is preserving capital for the expansion of its programs in a manner that
is consistent with Representative Gonzalez’s statement of the purpose of the
provision. If one assumes that the FHLMC decided to issue a dividend of some
kind, the issuance of that dividend in the form of preferred stock had essentially
the same effect of enhancing the capital position of the FHLMC as would the
sale of preferred stock. For these reasons, not only is the legislative history not
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inconsistent with the clear language of the statute, but it supports the import of
the language that the FHLMC has authority to issue a preferred stock dividend.
Finally, even if the legislative history were clearly contrary to the FHLMC’s
position, it would not overcome the unambiguous statutory language. As the
Supreme Court recently emphasized:
While we now turn to the legislative history as an additional tool
of analysis, we do so with the recognition that only the most
extraordinary showing of contrary intentions from these data
would justify a limitation on the “plain meaning” of the statu­
tory language. When we find the terms of a statute unambigu­
ous, judicial inquiry is complete, except in ‘“ rare and excep­
tional circumstances.’”
Garcia v. United States, 469 U.S. 70,75 (1984) (quoting TVA v. Hill, 437 U.S.
153, 187 n.33 (1978)). The use of legislative history is “only admissible to
solve doubt and not to create it.” Railroad Comm'n v. Chicago, B. & Q. R.R.,
257 U.S. 563,589 (1922). Moreover, the cited legislative history is not even in
the form of a committee report, but is the statement of a single legislator on the
floor of one House. “The remarks of a single legislator, even the sponsor, are
not controlling in analyzing legislative history.” Chrysler Corp. v. Brown, 441
U.S. 281,311 (1979). Thus, the legislative history does not alter our conclusion
that the transaction was authorized by the clear language of the statute.
Although OMB does not argue that any other statutory provision expressly
prohibits the FHLMC from declaring and paying a preferred stock dividend,
OMB contends that the transaction is prohibited by the purpose of the FHLMC
Act as derived from other provisions. OMB argues that the FHLMC was
prohibited from issuing the preferred stock dividend because the purpose of the
stock dividend was primarily to enhance the capital of the member thrift
institutions, which OMB regards as inconsistent with the FHLMC’s statutory
function. OMB argues that the FHLMC is authorized only to provide second­
ary mortgage market liquidity and not to boost the financial position of member
thrift institutions, relying upon 12 U.S.C. § 1454 and Association o f Data
Processing Service Organizations v. Federal Home Loan Bank Board, 568
F.2d 478, 486-89 (6th Cir. 1977). Therefore, the argument goes, any action
(such as the payment of a preferred stock dividend) that is directed toward the
latter purpose is beyond the power of the FHLMC.
In this instance, however, nothing in the statute or in the legislative history
restricts the discretion of the Board of Directors in the manner suggested by
OMB. The problem with OMB’s argument is that the purpose of the issuance of
a dividend is to benefit the stockholders. Because OMB concedes the FHLMC’s
authority to issue dividends, it must also concede the validity of that purpose.
Thus, even if the preferred stock dividend were intended to support the balance
sheets of member institutions, it would not be. improper on that basis alone.
Section 1454, which OMB cites as a limitation on the purposes of the FHLMC,
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is simply an authorization to engage in the purchase and sale of mortgages, and
not a restriction on the purposes for which preferred stock may be issued.5
Data Processing Service Organizations is similarly inapposite. In that case,
the United States Court of Appeals for the Sixth Circuit held that because of the
express statutory restriction against an FHL Bank engaging in outside business,
it was improper for an FHL Bank to sell data processing services to savings and
loan institutions. In that case, however, not only was there no express statutory
authorization to undertake the questioned activity, there was a specific prohibi­
tion against the FHL Bank engaging in that business. In the present instance,
the FHLMC has authority to issue dividends and has express statutory author­
ity to issue preferred stock on such terms as the Board of Directors prescribes,
and utilizing such preferred stock to pay a dividend to the common sharehold­
ers is not inconsistent with any of the authorized purposes or responsibilities of
the corporation.
OMB also argues that the dividend transaction is an unlawful effort to
circumvent the statutory provisions that establish a particular capital structure
for the FHLMC. Specifically, OMB contends that the preferred stock is essen­
tially common stock without the express statutory requirements imposed by
Congress on FHLMC common stock. See 12 U.S.C. § 1453. OMB notes that
FHLMC common stock may be issued only to FHL Banks and may be recalled
for retirement by the FHLMC, but that no such restrictions apply to the
preferred stock. OMB then argues that, because the preferred stock is entitled
to receive the first $10 million in dividends declared by the FHLMC and 90
percent of any additional dividends, and because preferred shareholders would
receive, in any liquidation of the FHLMC, 90 percent of the remaining assets of
the corporation, the preferred stock amounts in essence to common stock
issued without compliance with the statutory restrictions that must accompany
the FHLMC’s common stock. This argument is based upon OMB’s under­
standing that these terms and conditions vest “the principal attribute of com­
mon stock — the right to enjoy the unrestricted earnings (and, in liquidation,
the unrestricted assets) of the enterprise — on this ‘preferred’” stock.
This argument is ill-founded because it simply challenges the discretionary
judgment vested in the Board of Directors to establish the terms and conditions
under which the FHLMC may issue preferred stock. OMB has not suggested
any reason to doubt that the stock issued as a dividend is in fact preferred stock.
Moreover, § 1455(f) specifically empowers the FHLMC to issue preferred
stock “on such terms and conditions as the Board of Directors shall prescribe,”
as long as the preferred stock does not affect the status of the capital stock
issued under § 1453 as nonvoting common stock. The statute does not require
that preferred stock have the same restrictions as common stock.
5 Section 1454 does not contain any statem ent o f the purpose o f the FHLM C. It authorizes the purchase of
m ortgages, ju s t as § 1455 authorizes the FH L M C to create certain obligations and securities. If OMB were
co rrect in its argum ent, the FH L M C would a lso be precluded from paying a cash dividend as w ell, rather than
using the funds to purchase mortgages. O M B concedes, how ever, that the issuance o f a cash dividend is
perm issible. M oreover, OM B has not questioned w hether the issuance o f a dividend under the present
circum stances is contrary to good business ju dgm ent.
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In this instance, the terms and conditions established by the Board provide a
preference to dividends to the holders of the preferred stock over the holders of
common stock, the very essence of a preferred stock issue. See 11 M. Wolf,
Fletcher Cyclopedia o f the Law of Private Corporations § 5283, at 526 (1971).
The common stock remains unchanged in all other aspects. We are not aware of
any evidence that the Board in this transaction has abused the broad discretion
vested by this statutory provision with respect to the prescription of the terms
and conditions upon which preferred stock will be issued.6
Thus, based upon the clear statutory language of § 1455(0, as originally
adopted in 1982, the issuance of a preferred stock dividend seems to be fully
within the authority of the FHLMC.
2. The 1984 Amendment
Section 1455(f) was amended in 1984 by the addition of the language
highlighted below:
The Corporation may have preferred stock on such terms and
conditions as the Board of Directors shall prescribe. Any pre­
ferred stock shall not affect the status of the capital stock issued
under § 1453 of this title as nonvoting common stock and shall
not be entitled to vote with respect to the election o f any member
o f the Board o f Directors. Such preferred stock, or any class
thereof, may have such terms as would be required fo r listing o f
preferred stock on the New York Stock Exchange, except that
this sentence does not apply to any preferred stock, or class
thereof, the initial sale of which is made directly or indirectly by
the Corporation exclusively to any Federal Home Loan Bank or
Banks.
98 Stat. at 1697.
OMB argues that the last sentence indicates that § 1455(f) “contemplates the
sale only of preferred stock — a result which expressly proscribes the proposed
transaction.” In our view, however, the amendment contains no clearly ex­
pressed intent to alter the broad authority of the 1982 Act with respect to the
issuance of a preferred stock dividend. Because we have concluded that the
1982 Act authorized the FHLMC to issue a preferred stock dividend, it would
have been necessary for Congress expressly to eliminate that authorization in
the 1984 Act in order to preclude the transaction at issue.7 We find no such
evidence of congressional intent in either the language of the statute or its
6 W e note, in addition, that the term s and conditions o f the preferred stock also provide the Board with
discretion to issue additional preferred stock, which could be either junior, senior, or equal to the outstanding
preferred stock.
7 It is axiom atic that the views o f a subsequent legislature are not probative legislative history w ith respect
to the meaning o f a previously adopted statute. See U nited States v. P hiladelphia N a t'l Banky 374 U.S. 321,
34 8 -4 9 (1963). Thus, unless the am endm ent w ere actually intended to alter the authority granted in the 1982
Act, it would not prohibit the preferred stock dividend.
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legislative history. First, the language of the amendment itself does not even
remotely suggest that only the sale of preferred stock is permitted. The word
“sale” appears in the amendment only as part of the exception to the provision
that FHLMC preferred stock may meet New York Stock Exchange (NYSE)
listing standards.8 This one reference in the amendment is hardly sufficient to
impose a significant restriction on the authority granted in 1982.
Moreover, the legislative history of the provision indicates precisely the
opposite of OMB’s argument. The Senate report on the bill referred to the
amendment as “follow-on provisions to authority granted in earlier legislation
permitting the FHLMC to issue preferred stock. The earlier legislation failed to
prescribe any standards or conditions for issuance of such stock.” S. Rep. No.
293, 98th Cong., 1st Sess. 10 (1983). This statement suggests both that Con­
gress recognized that it had authorized the FHLMC to “issue” preferred stock
and not simply to sell it, and that the grant of such authority was exceptionally
broad and unrestricted. Nothing in the legislative history of the 1984 Act
suggests an intent to preclude the issuance of the preferred stock dividends.
B. The Validity o f the FHL Bank Dividends
The final question that remains with respect to the preferred stock dividend
transaction is whether the individual FHL Banks were statutorily authorized to
pass on the FHLMC preferred stock to their stockholders as a dividend.
Although OMB has not challenged this aspect of the transaction, we discuss
this issue in order to provide a complete response.
This question is governed by 12 U.S.C. § 1436, which sets forth the terms
and conditions under which the FHL Banks may pay dividends to their stock­
holders. This section generally authorizes the FHL Banks to pay dividends to
their shareholders, with the following restrictions: (1) all dividends must be
approved by the Bank Board; and (2) dividends may be paid only out of net
earnings remaining after all reserves and charge-offs required by the statute
have been provided for, except that if the Bank Board “determines that severe
financial conditions exist threatening the stability of member institutions, the
Board may suspend temporarily these requirements and permit each Federal
Home Loan Bank to declare and pay dividends out of undivided profits.” 12
U.S.C. § 1436(b).
All of these requirements seem to have been fulfilled with respect to the FHL
Banks’ dividends of FHLMC preferred stock. First, we understand that the
8 T he language o f the am endm ent might be read to p e rm it the issuance o f preferred stock with term s that
w ould allow listing on the N Y SE (NYSE term s) except w hen the stock is sold to FHL Banks. If that w ere true,
then there m ight be som e question whether th e FHLMC w as authorized to issue this stock to the FH L Banks
w ith the N Y SE term s. T he Senate report states, how ever, that the provision was intended to “require" that
preferred sto ck include the N Y SE terms and that the exception w as intended to indicate that “[p referre d
stock sold by the FH LM C exclusively to any Federal H om e Loan B ank o r Banks will not be required to meet
otherw ise a p p licab le New Y ork Stock Exchange requirem ents and can be sold upon w hatever term s and
conditions [the FH L M C ’s] B oard o f Directors chooses to include.” S. Rep. No. 2 9 3 ,98th Cong., 1st Sess. 10
(1983). T hus it seem s cle ar that the inclusion o f the N Y SE terms w as perm issible.
26
Bank Board has expressly approved all of the preferred stock dividends de­
clared by the FHL Banks. Second, we also understand that the Bank Board has
determined, by formal resolution, that severe financial conditions exist threat­
ening the stability of member institutions. OMB has not suggested that this
finding was in any way improper. Therefore, this finding satisfied the require­
ments of § 1436 and permitted the FHL Banks to transfer the FHLMC pre­
ferred stock as a dividend to their shareholders.
Conclusion
In conclusion, we find that the two preferred stock dividend transactions
were authorized under applicable statutes. First, the FHLMC acted pursuant to
clear statutory authority in granting a preferred stock dividend to the FHL
Banks. Second, the FHL Banks were similarly empowered to transfer that
preferred stock as a dividend to their shareholders.
R a lph W . T arr
Acting Assistant Attorney General
Office o f Legal Counsel
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