Reverse Stock Splits and Fractional Share Management: A Framework for Market Integrity

Executive Summary

The industry has experienced a 191% increase in reverse stock splits among exchange-listed issuers from 2023 to 2024, creating significant operational, financial, and regulatory challenges as sophisticated arbitrage strategies target fractional share “round-ups,” creating artificial demand patterns that mislead market participants and extract value at issuers’ expense, while mid-process term changes by issuers expose broker-dealers to unexpected risks and operational burdens that strain market infrastructure and undermine fair treatment between registered and beneficial shareholders. Although key operational stakeholders such as transfer agents and the Depository Trust and Clearing Corporation (DTCC) play important roles, ultimate accountability lies with issuers to ensure clear communication and execution.

This framework recommends four primary best practices to address these challenges: standardizing fractional share treatment by requiring cash-in-lieu treatment for all fractional shares to eliminate arbitrage opportunities; enhancing issuer disclosure requirements with plain English explanations of fractional share treatment, timing, and shareholder impacts; eliminating disparities in treatment between registered and beneficial holders to uphold shareholder fairness and reduce reconciliation complexities, while clarifying that consistent outcomes should be achieved through standardized issuer terms and broker-dealer processing, not by requiring duplicative beneficial owner level instruction processing at DTC; and establishing coordination among market participants through regular industry working groups and standardized communication protocols led and coordinated by SIFMA to ensure consistent information flow and responses across exchanges, issuers, transfer agents, clearing firms, and broker-dealers, providing a path forward to strengthen market infrastructure and ensure fair and transparent treatment of all shareholders. To support implementation, SIFMA will convene market participants through regular working groups and standardized communication protocols to provide additional guidance concerning these recommendations. While this white paper originated from concerns related to reverse stock splits, the operational risks and arbitrage incentives described apply to a wide range of corporate actions that result in fractional share entitlements, including stock dividends, mergers, and spin-offs. Issuers should consider applying these best practices consistently across all such events.