The Cyprus Securities and Exchange Commission (CySEC) has released new guidelines for investment firms offering fractional shares, addressing the growing trend of online brokers allowing investors to purchase only small portions of publicly listed stocks.

Cyprus Regulator Issues Guidance on Fractional Shares

In a circular issued today (Thursday), CySEC outlined the regulatory framework for Cyprus Investment Firms (CIFs) that enables clients to gain fractional exposure to shares through trust arrangements. The move comes as fractional investing has gained popularity, particularly among retail investors seeking to diversify their portfolios with smaller capital outlays.

“The Cyprus Securities and Exchange Commission has issued this Circular to provide guidance on the cases where fractional exposure in shares in companies, within the meaning of the Investment Services and Activities and Regulated Markets Law, transposing MiFID would qualify as exposure in shares per se,” explained the document signed by Dr. George Theocharides, Chairman of CySEC.

C659 - Fractionalisation of Shareshttps://t.co/So4H8chb4U

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The circular specifies that when CIFs use trust arrangements to offer fractional beneficial ownership of shares, these investments will be treated as direct share ownership. This classification subjects the services to the same regulatory obligations Obligations In finance, an obligation is a financial responsibility where the terms of a contract must be met. Should an obligation between parties fail then the party who is at default may face legal action. In this scenario, the guilty party will not only have to agree to pay the set amount to fulfill the contractual arrangement but may also be responsible for covering all legal proceedings cost. Routine payments or outstanding debt of any kind are considered financial obligations, so if someone owes you In finance, an obligation is a financial responsibility where the terms of a contract must be met. Should an obligation between parties fail then the party who is at default may face legal action. In this scenario, the guilty party will not only have to agree to pay the set amount to fulfill the contractual arrangement but may also be responsible for covering all legal proceedings cost. Routine payments or outstanding debt of any kind are considered financial obligations, so if someone owes you Read this Term as traditional share trading, including MiFID II and MiFIR requirements.

Key points from the guidance include:

• Trust arrangements must be properly documented and reflect clients' proportional ownership in CIF records.
• Fractional owners should receive proportionate rights, including voting rights and dividend distributions.
• CIFs must provide clear, accurate information to clients about the nature of fractional investments.
• The share trading obligation under MiFIR applies to fractional ownership through trusts.

The regulator emphasized that financial instruments offering fractional exposure without trust arrangements should not be presented as direct share ownership.

This clarification follows the European Securities and Markets Authority's (ESMA) March 2023 statement on derivatives based on fractional shares. CySEC's guidance complements ESMA's efforts by specifically addressing trust-based arrangements.

It is worth remembering that ESMA criticized fractional shares several months ago and suggested that they mislead investors. The regulator emphasized that fractional shares are a derivative instrument, not equivalent to corporate shares. Therefore, companies should not use the term “fractional shares” when promoting such products.

“All information provided to clients on these instruments shall be fair, clear, and not misleading and firms must clearly disclose all direct and indirect costs and charges relating to them,” ESMA ESMA European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t Read this Term wrote in a press release back in 2023.

Fractional Shares Surge in Retail Investing

The rise of fractional shares has transformed the retail investment landscape, despite regulatory concerns. The concept's simplicity has fueled its widespread adoption: investors can own a portion of high-priced stocks like Tesla or Apple, even with limited capital.

Fidelity Investments, a major US broker with 23 million clients, introduced fractional shares and ETF offerings in early 2020. However, this trend had already begun months earlier, with companies like Interactive Brokers and Charles Schwab launching similar products to compete with Robinhood. The popular commission-free trading app pioneered this offering in late 2019, setting a new industry standard.

As the Covid-19 pandemic unfolded, more brokers embraced fractional share trading. FXCM introduced commission-free trading on fractional shares, followed by platforms like Skilling and BUX in subsequent months.

In April 2023, shortly after ESMA's reservations, XTB also added fractional shares to its offerings. In the following months, it expanded the product to additional areas, including the UK in October and the UAE in December.

This year, GTN also added fractional shares to its offerings, and Public.com introduced a twist on this idea by offering clients fractional bonds.