The circular acknowledges that fractional exposure to shares can take the following forms:

• Permitted by issuer’s governing law: The issuance of fractional shares is permitted by the laws in the jurisdiction of the issuer, which have either been created as a result of a corporate action or issued in fractional form from the outset.
• Derivatives: Investors gain exposure to a derivative or other financial instrument that tracks the performance of a share in a way which results in fractional exposure to shares.
• Trust arrangements: A trust arrangement is used, resulting in fractional beneficial ownership of shares by an investor, ie two or more parties are the beneficial owners of the same share.

CySEC’s circular clarifies when fractional exposure to shares offered by Cyprus Investment Firms (CIFs) qualifies as exposure to shares and must comply with relevant obligations under Law 87(I)/2017 and MiFIR. This includes share trading and client asset safeguarding obligations.

The circular focusses on providing guidance to CIFs when enabling their clients to gain exposure to fractional shares through trust arrangements.

The circular does not deal with situations where the issuance of fractional shares is permitted under the issuer’s law or where fractional shares take the form of derivatives or other financial instruments.

The circular clarifies that fractional shares held through trust arrangements should be treated as shares for IS Law and MiFID II purposes. The same applies for situations where fractional shares are permitted by the laws of the jurisdiction of the issuer.

Financial instruments enabling investors to undertake fractional exposure in shares, under arrangements that do not constitute trust arrangements, are not shares for IS Law purposes, in CySEC’s view.

When using a trust arrangement, such that a CIFs holds shares on behalf of multiple clients, conferring fractional beneficial ownership, CIFs must, without prejudice to their general obligations, ensure that:

• The trust arrangement must be documented in writing (including in the relevant agreement between the CIF and the client as appropriate).
• The proportion of beneficial ownership in shares which a client holds (including through sub-custody arrangements) must be reflected in the records of the CIF.
• All rights emanating from shares must be proportionately conferred to clients on the basis of their entitlement, including voting rights, rights to dividends, residual interest to the assets of the issuer in the case of winding up, and the transferability of the shares.
• CIFs must, inter alia, provide, in comprehensible form, clear accurate and non-misleading information to clients and prospective clients on the financial instruments they offer and their services.
• The share trading obligation under Article 23 of EU Regulation 600/2014 (MiFIR) is complied with.
• Obligations relating to safeguarding client-assets under CySEC Directive DI87-01 for the Safeguarding of Financial Instruments and Funds belonging to clients is complied with.
• Where a CIF qualifies as a systematic internaliser for shares under the IS Law, to comply with applicable obligations.

CySEC’ Circular can be found here.