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,” commented the document signed
by Dr. George Theocharides, Chairman of CySEC.

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 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 that firms must clearly disclosed all direct and indirect
costs and charges relating to them,” ESMA 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 had 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.