Fractional shares: An update on the regulatory approach

Regulatory response

As for the financial services regulatory response to fractional shares, the picture is arguably mixed with some regulators being quite advanced in their approach and having already issued rules whilst others are still developing their approach or have no approach at all. An issue that has been prevalent in the debate on fractional shares, at least in Europe, is whether they are in fact derivatives. More recently, another key concern has been investor protection, particularly as more retail investors invest in fractional shares via so-called neo-brokers.

For example, the United States is perhaps one of the more advanced regimes, with the Financial Industry Regulatory Authority (FINRA) issuing guidelines on the reporting and handling of fractional shares. FINRA is now implementing enhancements to support the reporting of fractional share quantities. Elsewhere in the world, the UK FCA issued an update on fractional shares in 2023, setting out its expectations when fractional shares are offered to retail clients and, more recently, from the European Union perspective, the European Securities and Markets Authority (ESMA) has issued a public statement which suggests that further action is down the line. At the other end of the spectrum, in Hong Kong, the Securities and Futures Commission (SFC) has not issued specific guidance on fractional shares but the Companies Registry provides general information on share capital transactions, which might be relevant. For example, the Companies Ordinance (Cap. 622) adopts a mandatory system of no-par for all local companies having a share capital and retires the concept of par value for all shares.

The remainder of this briefing note provides a deeper dive into the activities of IOSCO, FINRA, ESMA, FCA and SFC. 

IOSCO

In March 2023, IOSCO issued a final report¹ from its Retail Conduct Task Force noting that many of its members had observed increasing levels and volumes of self-directed trading including in fractional shares. This move away from financial intermediaries to self-directed investing was particularly prevalent among younger investors trading through mobile apps and online platforms. However, despite the benefits, some of IOSCO’s members warned that there was a lack of specific regulation on self-directed trading which may lead to investor protection issues and that firms could be offering products under existing regulatory exemptions that may not have been envisaged.

More recently, IOSCO issued a consultation report on neo-brokers², a subset of brokers, characterized by providing online-only investment services with very limited or no human interaction with the retail investors who use their services. One of the common neo-broker activities observed by IOSCO was trading in fractional shares. IOSCO noted that neo-brokers’ low- or zero-commission structure may encourage practices that prioritize the firm’s interest over retail investors’ interests. This included engaging in trading activities that generate other sources of revenue for the broker, such as trading fractional shares which may benefit the neo-broker through systematic internalization. Other concerns related to disclosures provided to retail investors and whether these might be misleading as regards their corporate rights. The consultation report set out a list of potential recommendations and closed on May 12, 2025. IOSCO’s work program for 2025 indicates that a final report is due in H2 2025.

FINRA

Regulatory obligations

The principal requirements applicable to US Security Exchange Commission (SEC)-registered broker-dealers conducting transactions in fractional shares are as follows:³ 

• FINRA trade reporting: FINRA requires broker-dealers to report OTC transactions in equity securities to one of FINRA’s trade reporting facilities. FINRA’s current trade reporting facilities only support reporting of whole-share quantities, which requires rounding up or down of fractional share quantities. However, beginning in February 2026, FINRA will require firms to report fractional share quantities. These requirements are further discussed below.
• Consolidated Audit Trail (CAT): Broker-dealers are required to report specified order, routing and trade events in exchange-traded and over-the-counter (OTC) equity securities to the CAT Central Repository, including any fractional share quantities.
• Other trading rules: Other requirements applicable to transactions in fractional shares include best execution (FINRA Rule 5310), disclosure of order routing information (Rule 606 of SEC Regulation NMS), compliance with trading halts (FINRA Rule 5260), and trading restrictions during periods of extraordinary market volatility (FINRA Rule 6190).

Updates to trade reporting requirements

FINRA is adopting enhancements to its equity trade reporting facilities to accommodate reporting of fractional share quantities.⁴

• Current requirements:
  • FINRA’s trade reporting facilities do not support the entry of fractional share quantities. As a result, firms must report fractional share transactions using whole-share quantities only. For transactions of less than one share, quantities are rounded up to one (for example, a transaction for 0.4 of a share is reported as 1 share); for fractional transactions above a single share, the fractional component is rounded down (for example, a transaction for 100.5 shares is reported as 100 shares).
• New requirements. To provide accurate reporting of transactions in fractional shares, FINRA is updating its trade reporting systems to introduce two separate reporting fields:
  • A “Quantity” field, which will remain as is: Firms will be required to report trades in whole-share quantities, rounding up or down consistent with current practice.
  • A new “Fractional Share Quantity” field: Firms will be required to report transactions in fractional shares up to six decimal places, without rounding.  

Broker-dealers will be required to report fractional share quantities, as described above, for NMS stocks beginning on February 23, 2026 (with testing beginning in November 2025).⁵ The implementation date for OTC Equity Securities will be announced by FINRA in a future Notice.

Effective practices

According to FINRA guidance, effective practices for conducting transactions in fractional shares include the following:⁶

• Best Execution Reviews: Firms should incorporate fractional share transactions in required best execution reviews to confirm that the firm’s practices are reasonably designed to achieve best execution.
• Dividend Reinvestment Programs: Firms participating in dividend reinvestment programs should confirm that fractional share transactions are reported, as required.
• System Capacity and Data Validation: Firms should confirm that IT systems have adequate system capacity to report trades to FINRA within 10 seconds of execution and verify that the transaction data is reported accurately in accordance with applicable requirements.
• Supervisory Processes: Firms should incorporate fractional share transactions into their supervisory procedures in order to confirm compliance with regulatory requirements described above.   

ESMA

In March 2023, ESMA issued a public statement which focused on instruments enabling investors to access fractions of shares by way of derivatives which derive their value from the price of an underlying corporate share rather than products providing access to fractions of shares in any other way, for example, co-ownership structures.

The statement described certain disclosure requirements including that all information to clients, including marketing information, be fair, clear and not misleading. In addition, ESMA emphasized that derivatives on fractions of shares are not corporate shares and therefore there should be a clear and prominent disclosure to the client describing in plain language that the client is buying a derivative instrument and explaining the differences between such derivatives and corporate shares with respect to rights inherent to corporate shares such as dividend and voting rights. ESMA warned that derivatives on fractions of shares were not corporate shares and as such, firms should not use the term ‘fractional shares’ when referring to these instruments. ESMA would deem the use of such term as misleading and in breach of the requirements set out in the Markets in Financial Instruments Directive II (MiFID II).

In July 2024, ESMA issued a risk analysis paper⁷ on neo-brokers operating in the EU. The paper picked up on ESMA’s earlier public statement highlighting both the benefits and risks of fractional shares. Whilst neo-brokers offering ‘fractional shares’ gave consumers access to investments that would otherwise have prohibitive minimum investment amounts, there were risks around complexity (and related costs) if consumers do not understand that these investments could only be exchanged with the neo-broker and not on other trading platforms. Whilst usually allowing investors to participate in the share performance of an issuer and receive dividends on a pro rata basis, the paper added that they often do not come with voting rights, unlike most equity shares. 

More recently, ESMA issued a letter⁸ to the European Commission (Commission) regarding the qualification of fractional shares under MiFID II, given that fractional shares accounted for more than 10 percent of the total number of transactions reported in 2023/2024. 

Neither MiFID II, nor the Markets in Financial Instruments Regulation (MiFIR), provides for a definition of fractional shares and as such, these instruments were defined and governed by national or case law. In some Member States they were classified as a derivative whereas in others they were classified as a share. ESMA also observed that fractional shares were being traded over-the-counter through bilateral contracts between brokers and investors based on varying underlying business models and that these different models, combined with different national legal frameworks resulted in an inconsistent classification of those instruments across the EU.

ESMA also warned that the differing approaches to classification raised further issues regarding transparency requirements under MiFID II/MiFIR. Annex A to ESMA’s letter provided the following details:

• Transparency and reporting requirements: The transparency regime for fractional shares differs based on their classification as either shares or derivatives or another category. When classified as shares, fractional shares follow the same transparency and reporting rules as full shares. However, if classified as derivatives, they would not be subject to the same requirements, creating a potential loophole that could be exploited to circumvent transparency obligations.
• Systematic Internaliser (SI) regime and Share Trading Obligation (STO): Legal uncertainty regarding the classification of fractional shares affects compliance with the SI regime and the STO. An assessment by ESMA revealed that certain firms were not classified as SIs due to ambiguities in the classification of the instruments they offer.
• Calculation of thresholds for data reporting services providers (DRSP)s derogation criteria: The classification of fractional shares also affects the calculation of thresholds for the DRSP derogation criteria, that is, whether a DRSP is subject to supervision by ESMA or national competent authorities.

Whilst not included in the letter, presumably the differing classifications also raise issues under the European Market Infrastructure Regulation in the sense that when a fractional share is considered to be an actual share it would not be reportable since it would not be considered to be a derivative.  

In its concluding comments ESMA stated that it “believes it would be helpful to clarify that fractional shares replicating the key characteristics and trading environment of shares should remain subject to the rules applicable to shares under MiFIR.” The letter did not elaborate on what exactly are the key characteristics and trading environment of shares, although this may be something that may be further considered once the Commission has reviewed ESMA’s letter. Exactly how the Commission will respond remains to be seen.

FCA

There has been some debate in the UK as regards fractional shares and Individual Savings Accounts (ISAs). Previously HM Treasury (HMT) maintained that fractional shares were not eligible for ISAs, although that began to change with the 2023 Autumn statement in which HMT announced that the Government intended to permit certain fractional shares contracts to be eligible ISA investments. However, change did not come immediately. The same Government subsequently announced in the 2024 Spring Budget that new legislation would not be introduced before the end of the 2024 summer due to the general election. Following the election of a new Government in the summer of 2024, the Individual Savings Account and Child Trust Fund regulations were laid before Parliament on October 14, 2024 to allow certain fractional interests to be bought in a stocks and shares ISA, junior ISA (JISA) and child trust funds.

Interestingly, following the 2023 Autumn statement the FCA issued a new page⁹ on its website that sought to clarify its expectations of firms offering fractional shares to the retail market under the Consumer Duty. The FCA issued the page in light of its 2022-2025 strategy in which it committed itself to ensuring that consumers could access investments that reflect their risk appetite and receive appropriate information that supports them in making decisions. 

The page started with the FCA making two key points:

• Firms offering fractional shares must act in good faith, avoid causing foreseeable harm, and enable and support consumers to pursue their financial objectives.
• Firms should carefully consider whether their fractional share offerings are delivering good outcomes for consumers, in line with the Consumer Duty.  

Building on these the FCA then described certain characteristics of fractional share models that firms should consider that may impact consumer outcomes. These generally relate to corporate rights, echoing the concerns raised in the ISOCO paper mentioned earlier. The characteristics identified were:

• Any limits on transferability (for example, where the consumer cannot transfer their investment to another firm) or the consumer’s ability to trade fractional shares. 
• When fractional share trades will be executed including whether the firm aggregates share orders to whole shares in order to fulfil trades and how this may affect the price for consumers.
• What fees and charges consumers will incur, including foreign exchange conversion charges or other fees impacted by trading in shares issued by companies outside the UK.  
• Whether consumers understand if they will have voting rights or other shareholder rights based on their holdings and how these rights can be exercised.  
• Whether consumers understand if they will receive dividend income based on their holdings and how this is calculated.  
• Whether consumers understand their ownership rights to their fractional share holdings, including how investments may be recovered in the event of a firm failure.  

Having identified the above characteristics the FCA went further, setting out more detailed expectations for firms under the Consumer Duty under the following headings:

• Products and services. Firms must ensure fractional share products and services are appropriately designed, meet the needs, characteristics and objectives of the identified target market, and avoid causing foreseeable harm to consumers in that market. For new fractional share offerings, the product approval procedure must ensure all relevant risks to the target market are assessed to ensure that the design of the product is appropriate for the target market.
• Price and value. Firms must ensure that fractional share products and services offered provide fair value to consumers. In addition, firms must carry out a value assessment of their products and review that assessment on a regular basis. Some considerations when carrying out a value assessment for fractional shares are likely to include:  
  • Where a consumer cannot transfer their fractional share holdings to another firm without liquidating their position, whether this may lead to additional transaction costs from selling and repurchasing their holdings.  
  • Where firms offer subscription models to trade fractional shares (that is, subscription plans to access stocks and an amount of trades), whether these models provide fair value relative to the benefits that the model provides.
• Consumer understanding. Firms offering fractional shares are to ensure consumers are provided with information that meets their needs, and equips them to make effective, timely and properly informed decisions. Firms must also ensure their communications are likely to be understood by consumers and consider testing to gain assurance that any complex technical details are understood. Firms should consider providing information about the features, costs, benefits and to ensure their retail consumers are likely to understand whether the investment meets their needs. In particular, it may be appropriate for firms to explain comparative differences or expectations between holding a whole share as opposed to a fractional share such as those related to transferability or the ability to exercise voting rights.  
• Consumer support. Firms must provide support that meets their consumers’ needs, so they can use the product or service as reasonably anticipated. For example, firms should enable consumers to pursue their financial objectives and ensure that they can act in their own interests when buying, holding and selling fractional shares. Firms should also monitor the support they provide, take relevant feedback into account, and look for signs that may indicate that the design and delivery of their support is not sufficient to meet the needs of consumers. Where this is the case, firms should take reasonable steps to address any shortfall in the support they provide.

Whether there will be more from the FCA on fractional shares remains to be seen. No future work on the issue is set out in the latest edition of the UK Regulatory Initiatives Grid. But whilst the UK is no longer part of the EU it may be the case that there may be further communications in light of any activity from the Commission in response to ESMA’s letter.

SFC

Hong Kong does not have specific regulations governing fractional shares as a distinct concept and there have been no recent communications from the SFC on this point. The Hong Kong Companies Ordinance allows companies to consolidate or subdivide their shares, meaning they can create a larger or smaller number of shares. This process effectively allows for the creation of fractional shares, as investors can own a portion of a share rather than just whole shares. Hong Kong has also transitioned to a no-par value regime for shares, meaning shares do not have a defined par value. While this may seem to simplify the process of subdividing shares, it does not fundamentally change the legal framework for allowing fractional share ownership, as the focus remains on the number of shares and their subdivision. While the SFC may not have specific regulations on fractional shares, its guidance on matters like dividend distributions can indirectly impact how fractional shares are handled. 

Brokers in Hong Kong may offer fractional share trading, allowing investors to buy or sell parts of shares. These brokers are responsible for complying with the relevant regulations and ensuring that fractional share trading is conducted in a fair and transparent manner.

Conclusion

As more and more retail investors begin to invest in fractional shares through different platforms and neo-brokers regulators will become more interested in fractional shares and the risks they present. From the United States FINRA, with its established rules, is moving forward with reporting reforms and investment managers operating in that region will need to keep an eye on further communications and update their reporting accordingly. From the EU perspective, ESMA’s letter to the Commission suggests that there may be more to come so investment managers operating in the region should carefully monitor developments. For the United Kingdom, the FCA has already issued its thinking in the form of a webpage on how the Consumer Duty impacts those firms offering fractional shares and there may be more to come. From Hong Kong, the position appears that the status quo will continue, with the SFC relying on its existing guidance.