Fractional Shares in FINRA’s Crosshairs for 2023

In its 2023 Examination and Risk Monitoring Program report, FINRA called out Fractional Shares as a “new” focus item. With the proliferation of fractional share offerings over the last three years, FINRA offers clarity in the report around Fractional share trade reporting and order handling rules.

What is Fractional Trading?

FINRA first addressed Fractional Share trade reporting in an update to Trade Reporting FAQs (Q101.14 and Q101.15) in 2017. “When reporting a trade for fractional shares, firms should delete the fraction and report the whole number, except if the whole number would be 0 (zero). If the whole number would be 0, firms should round up to 1”.  In other words, 20.25 shares would be trade reported as 20; .25 shares would be reported as 1.

The proliferation of fractional trading began in 2019, largely attributable to historically high dollar prices in highly desirable stocks, with Robinhood and other self-directed platforms. Fractional trade reporting received high-profile attention when Warren Buffet called out this anomaly as the reason for a ten-fold jump in the share volume of Berkshire Hathaway stock.

What Firms Should Be Doing

Member firms that deal in fractional shares need to recognize that despite the fact that the Trade Reporting Facilities (TRFs) and the Over the Counter Reporting Facility (ORF) do not support the entry of fractional shares, they are still required to trade report and provide all order, route, and trade events to the CAT Central Repository. Additionally, FINRA is clear that all applicable marketplace rules also apply to fractional shares, including order handling rules, best execution, among others.

Whether a firm currently offers fractional shares or is considering them for the future, additional items to take into account include:

• Validation process for Consolidated Audit Trail (CAT), TRF, and ORF reporting
• Relevant disclosures
• Challenges related to Dividend Reinvestment Plans (DRPs) and other corporate actions (splits)
• Considerations regarding “held/not held” orders and implications to SEC required Rule 606 reporting
• Principal facilitation and capacity considerations (principal, agency, riskless principal)
• Reg SHO

Firms that execute or facilitate fractional share trading must have appropriate supervisory systems in place to ensure accurate and timely trade reporting. Supervisory procedures should ensure appropriate routing, exception reports, and best execution reviews are completed regularly and rigorously with all other orders.

Oyster consultants bring first-hand experience in trading, risk management, operations and compliance. Oyster’s experts will review your trade reporting procedures, assess your risks, and test your controls. Our team will also review your supervisory systems and procedures to ensure your firm remains compliant.

Oyster Consulting provides solutions through our consulting services and our proprietary CAT reporting software. Our consultants use their deep regulatory experience in trade reporting to help firms achieve their CAT reporting obligations and get the most out of their CAT reporting investment.