Aug. 27, 2024
I am writing to express dissent and call out concerns and risks with the NSCC’s proposed rule change outlined in SR-NSCC-2024-007. I am against the proposed rule/changes in their current form. There is no consistent definition of a fractional share. Per the SEC, "The way you buy and sell fractional shares differs between brokerage firms that provide this service to their customers." "You may not have voting rights if you own fractional shares. Your ability to exercise proxy voting will depend on how your brokerage firm’s fractional share investing program works. Some brokerage firms allow it, with special procedures, and some firms do not allow it at all. Ask your brokerage firm whether you will have any voting rights associated with fractional share purchases." Why is there the need for a rule to handle the trading of what is merely account entries? Why is this needed if most companies do not issue fractional shares? In JP Morgan’s comment letter they write "Fractional shares are not issued by the issuer but rather are account entries meant to represent the portion of a whole share (held by a broker or another party) that an account holder would be entitled to (including ongoing appreciation and depreciation) if fractional shares existed and could be traded in the marketplace." According to Delaware law, which many companies are incorporated in, If fractional shares are not mentioned in the by laws, then there are no fractional shares. The NSCC does not provide strong support this is needed. Are fractional shares such an issue that they need to be included with CNS and receive the benefits of netting? From the NSCC’s proposal they say the following “From an operational perspective, NSCC is only able to accept trades for clearing in units of full shares.” “Moreover, stocks do not trade on exchanges in units of less than one share, and trades may only be reported to a trade reporting facility in multiples of one share.” “NSCC proposes to revise its Rules to allow an exception to the Real-time Trade Submission Requirement for Correspondent Clearing transactions representing aggregated transactions of fractional shares.” “NSCC believes that the benefits of bringing these transactions into central clearing (e.g., their inclusion in Continuous Net Settlement (“CNS”) netting, NSCC risk management and NSCC’s trade guaranty) would justify the exception for such transactions from the Real-time Trade Submission Requirement.” Are there any opportunities for abuse? If orders can be broken up into odd lots to negatively impact price discovery, what prevents 1 share from being split into multiple fractional shares? In conclusion, for the following reasons I am against the current proposal There is no consistent definition of what a fractional share even is Concerned it goes against the intent of issuing companies when they issue shares in full units Limited support justifies this is truly needed. Fractional trading has been around for a while. Why is this suddenly needed now? See risk with allowing fractional shares to receive benefits from central clearing. There is no justification a fractional shares needs to receive benefits of CNS See potential abuse around splitting 1 share into multiple fractional shares similar to how 100 shares can be split into odd lots to avoid full impact to price discovery Footnotes: https://www.sec.gov/oiea/investor-alerts-and-bulletins/fractional-share-investing-buying-slice-instead-whole-share https://www.sec.gov/divisions/investment/noaction/2016/jpmorgan-041416-206(3)-incoming.pdf https://codes.findlaw.com/de/title-8-corporations/de-code-sect-8-155.html Regards, Jack