CySEC Introduces New Regulations For Companies Offering Fractional Shares

The Cyprus Securities and Exchange Commission (CySEC) has introduced new regulations for investment firms offering fractional shares. The aim is to clarify when these investments qualify as direct share ownership under the European Union’s MiFID II.

This update seeks to provide greater regulatory clarity for Cyprus Investment Firms (CIFs) that allow clients to gain fractional exposure to publicly traded stocks.

The Regulator Aims To Guarantee Rules To Safeguard Small Investors

In a circular released, CySEC stated that its primary goal is to guide CIFs on offering fractional ownership of shares through trust-based arrangements.

The regulator highlighted that fractional investing, which has gained popularity, particularly among retail investors with smaller capital outlays, should be properly regulated to protect investors.

According to CySEC, the guidelines outline how fractional ownership under trust arrangements will be treated as direct share ownership. This means that investment firms offering fractional shares through trust structures will now face the same regulatory obligations as those offering traditional share trading.

These include the stringent rules set out by the Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR).

The Commission noted several key points in its new guidance. CIFs offering fractional shares must ensure that trust arrangements are thoroughly documented to reflect clients’ proportional ownership.

The CySEC created these rules to make sure people know when these small parts of shares count as real ownership under the European Union’s MiFID II laws.

CySEC’s chairman, Dr. George Theocharides, stated that fractional share trading using trust arrangements now follows MiFIR’s rules about share trading. He also added that it’s important for companies to give clear information about these shares, including any costs. Fractional shareowners should get the same rights as full shareholders, like voting and receiving dividends.

Dr. Theocharides also explained that if fractional shares don’t use trust arrangements, they should not be shown as real ownership of shares. This statement was made after the European Securities and Markets Authority (ESMA) raised similar concerns earlier this year.

In March 2023, ESMA said that fractional shares could confuse investors and should be seen as financial tools, not real shares. ESMA also asked companies not to call these parts “fractional shares” when telling people about them, and to always show the full costs clearly.

CySEC Wants Companies To Be Clear And Honest About Fractional Shares

Even though there are some worries about rules, fractional share investing has become very popular, especially with retail investors. It allows people to buy small parts of expensive stocks like Apple or Tesla, even if they don’t have enough money to buy a whole share.

CySEC’s new rules come as more big companies, like Interactive Brokers, Fidelity, and Charles Schwab, start offering fractional shares. This trend grew during the COVID-19 pandemic, with platforms like Robinhood making it even more popular with their commission-free trading.

As more people use fractional shares, CySEC wants to make sure that companies follow the rules and keep things clear and fair for investors. CySEC’s main goal is to protect people who invest by making sure companies are honest and transparent about fractional shares.