The Cyprus Securities and Exchange Commission (CySEC) has released a new set of regulatory guidelines aimed at investment firms offering fractional shares. As fractional investing gains traction among retail investors, the new rules clarify when such investments qualify as direct share ownership under the EU’s Markets in Financial Instruments Directive (MiFID II).
Clarifying Fractional Share Ownership for CIFs
In its latest circular, CySEC provides a detailed framework for Cyprus Investment Firms (CIFs) offering fractional exposure to shares through trust arrangements. This guidance ensures that such investments are treated as direct share ownership, thereby subjecting them to the same regulatory obligations as traditional share trading under MiFID II and MiFIR. According to Dr. George Theocharides, Chairman of CySEC, the guidance aims to provide clarity for investment firms and enhance investor protection.
Key Requirements for Fractional Share Arrangements
The guidelines specify that when CIFs use trust arrangements to offer fractional shares, these must be properly documented, reflecting clients’ proportional ownership in the firm’s records. Fractional shareholders are also entitled to receive proportional rights, such as voting rights and dividend distributions, similar to full shareholders.
In addition, CIFs must offer clear and accurate information to their clients regarding the nature of these fractional investments and disclose all direct and indirect costs. The circular emphasizes that any financial instruments providing fractional exposure without trust arrangements should not be marketed as direct share ownership.
Aligning with ESMA’s Stance on Fractional Shares
CySEC’s move comes after the European Securities and Markets Authority (ESMA) issued a statement in March 2023, criticizing the use of the term “fractional shares” for instruments that are derivatives and not actual corporate shares. ESMA highlighted that this terminology could mislead investors, as these instruments do not confer the same rights and protections as traditional stock ownership.
CySEC’s guidelines are intended to complement ESMA’s efforts by specifically addressing trust-based fractional ownership structures. The regulator is particularly concerned that fractional shares, when improperly marketed, could obscure the true nature of the investment and the associated risks.
The Growing Popularity of Fractional Shares
Despite regulatory concerns, fractional share investing has surged in popularity, transforming the retail trading landscape. The ability to purchase a fraction of high-priced stocks such as Apple or Tesla has made investing more accessible to a broader audience, particularly those with limited capital.
The trend started gaining momentum in late 2019 when Robinhood pioneered the offering, and major brokers like Fidelity, Interactive Brokers, and Charles Schwab quickly followed suit. During the Covid-19 pandemic, the demand for fractional shares increased further as retail investors looked for affordable ways to diversify their portfolios.
Other brokers, including FXCM, Skilling, and BUX, have also jumped on board, launching fractional share offerings. More recently, XTB expanded its fractional trading services across several regions, including the UK and the UAE. GTN and Public.com have also introduced new iterations of fractional trading, with Public.com even rolling out fractional bonds as an alternative investment option.
Regulatory Implications for CIFs
With the release of this circular, CySEC is urging CIFs to reassess their offerings to ensure compliance with the new guidelines. This move is expected to reshape how brokers market and manage fractional investments in Cyprus, reinforcing transparency and investor protection.
Dr. George Theocharides highlighted the importance of these rules, stating, “The new framework aims to clarify when fractional exposure in shares qualifies as direct share ownership, ensuring that investors receive fair treatment and protection under existing EU regulations.”
As fractional investing continues to evolve, regulatory bodies like CySEC are likely to implement further guidelines to keep pace with market trends and safeguard retail investors.
