Fractional Shares: Reporting and Order Handling
NEW FOR 2023
Regulatory Obligations and Related Considerations
FINRA’s trade reporting rules generally require member firms to transmit last sale reports of transactions in equity securities to a FINRA trade reporting facility (TRF) or FINRA’s over-the-counter trade reporting facility (ORF) as applicable. Member firms must transmit these reports as soon as practicable, but no later than ten seconds after execution.1
Although the TRFs and the ORF do not currently support the entry of fractional share quantities, these trades are required to be reported subject to FINRA guidance, which requires rounding quantities up to one if less than one share and truncating the fractional quantity for transactions that involve both a whole-share and fractional-share quantity.2 Member firms are required to report order, route and trade events in NMS stocks and OTC equity securities to the CAT Central Repository, including any fractional-share quantity.
Member firms that execute trades in fractional shares must also comply with other marketplace rules, including FINRA Rules 6190 (Compliance with Regulation NMS Plan to Address Extraordinary Market Volatility) and 5260 (Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts). Additionally, member firms must comply with FINRA’s order handling rules, including FINRA Rule 5310 (Best Execution and Interpositioning), in handling and executing customer fractional share orders.3
- How does your firm ensure that its required CAT, TRF and ORF reports involving fractional shares are submitted in a timely manner, are complete and accurate, and reported in accordance with applicable reporting requirements?
- Does your firm assess whether it has provided adequate disclosure of its fractional share order handling policies to customers?
- If your firm participates in a Dividend Reinvestment Program, does it confirm that any resulting fractional share activity is compliant with your firm’s regulatory obligations related to TRF, CAT and ORF reporting?
- If your firm handles fractional or cash based orders on a Not Held basis, has it reviewed the SEC’s updated Responses to Frequently Asked Questions Concerning Rule 606 of Regulation NMS regarding categorizing customer orders as Held or Not Held?
Findings and Effective Practices
- Reporting Failures: Failing to report fractional share orders, routes and trades to trade reporting facilities as required (e.g., reporting orders, routes and trades to CAT but failing to report to a TRF or ORF an executed transaction for a quantity of less than one share), or failing to report in an accurate, complete and timely manner.
- Inadequate Supervisory Systems and Procedures: Failing to establish and implement a reasonably designed supervisory system and procedures to confirm that fractional share orders, routes and trades were accurately, completely and timely reported as required to a TRF, the ORF and CAT.
- FINRA Resources: Reviewing FINRA’s guidance on fractional share executions and other events, including FINRA’s CAT and Trade Reporting FAQs; and contacting FINRA with questions related to the reporting of fractional share orders, routes or executions.
- Dividend Reinvestment Programs: Reviewing how your firm or clearing firm processes dividend reinvestments to ensure that fractional share transactions and other events are properly reported, as required.
- Supervisory Processes: Establishing and maintaining reasonably designed best execution supervisory processes that address fractional share orders, order routing and executions; and regularly evaluating exception reports supporting the firm’s supervisory processes and modifying them, as appropriate, to reflect current market circumstances.
- System Capacity and Data Validation: Confirming there is adequate system capacity to report trades to a TRF or ORF within ten seconds of execution; and verifying that the reported transaction data was reported timely, accurately and completely in accordance with the requirements of the applicable facilities.
- Best Execution Reviews: Including fractional share orders, routes and executions in regular and rigorous best execution reviews to confirm that the firm’s practices are reasonably designed to achieve best execution.
1 See FINRA Rules Series: 6200 (Alternative Display Facility); 6300A (FINRA/NASDAQ Trade Reporting Facilities); 6300B (FINRA/NYSE Trade Reporting Facility); 6620 (Reporting Transactions in OTC Equity Securities and Restricted Equity Securities); 7100 (Alternative Display Facility); 7200A (FINRA/NASDAQ Trade Reporting Facilities); 7200B (FINRA/NYSE Trade Reporting Facility); and 7300 (OTC Reporting Facility).
3 See also the Best Execution section of this report.