Reverse Stock Splits and Fractional Share Round-Ups

Summary

SIFMA provided comments to the New York Stock Exchange (NYSE) and Nasdaq regarding the recent increase in corporate action events by exchange-listed issuers involving reverse stock splits.

Excerpt

March 25, 2025

Via Electronic Submission

Kathryn Mordeno

Manager, Regulation

New York Stock Exchange

11 Wall Street

New York, NY 10005

Eun Ah Choi

Senior VP, Regulatory Operations

Nasdaq, Inc.

151 West 42nd Street

New York, NY 10036

Re: Reverse Stock Splits and Fractional Share Round-Ups

Dear Ms. Mordeno and Ms. Choi:

SIFMA ¹ appreciates the opportunity to share our concerns with the New York Stock Exchange (“NYSE”) and the NASDAQ Stock Market LLC (“Nasdaq”) (the “Exchanges”) regarding the recent increase in corporate action events by exchange-listed issuers involving reverse stock splits. Nasdaq and NYSE have recently implemented a series of rule changes designed to limit issuer use of reverse stock splits to regain compliance with their minimum share price requirements. ² We commend the NYSE and Nasdaq on these rule changes and encourage continued Exchange focus on this topic and other issues related to low-priced securities. ³

From 2023 to 2024, SIFMA members observed a 191% increase in reverse stock splits among exchange-listed issuers. ⁴ Reverse stock splits, especially at this level, present significant operational, financial, and market integrity challenges to a range of market participants including investors, issuers, exchanges, broker-dealers, registered clearing agencies, and transfer agents. As our members have recently experienced, and as detailed below, these challenges are exacerbated when issuers change the terms of a reverse stock split after the initial effective date of the split.

SIFMA encourages the Exchanges to take proactive measures to ensure that reverse stock splits are executed in a transparent, consistent, and predictable manner. SIFMA suggests that the Exchanges consider either implementing a set of uniform rules governing how reverse splits are announced and effected or explore alternative approaches that achieve the same objectives. Specifically, SIFMA recommends that the Exchanges consider rules or other measures that (1) prohibit issuers from changing the terms of a reverse stock split after the terms have been publicly announced; (2) establish cash in lieu payouts as the standard treatment for fractional shares; (3) establish consistent processes for handling fractional shares in connection with reverse splits; and (4) implement separate payment processes for registered holders to reduce discrepancies in payment allocations between registered and beneficial holders, including differences in timing, method of cash in lieu payments, and treatment of fractional shares across different broker dealers and clearing systems. ⁵ Possible alternative approaches to changing Exchange rules include providing additional education to issuers on the impact of roundups or address issuers that repeatedly alter reverse split terms. We discuss each of these items in detail below.

While the Exchanges are developing and implementing these rules, we encourage the Exchanges to engage issuers listed on their platforms and advise them on how reverse splits can affect their shareholders, other market participants, and the integrity of the capital markets. Disclosures about reverse stock splits must be improved so that lay investors can easily understand the implications these corporate events will have on their current and future holdings.

1. Background

A reverse stock split is a corporate action where a specified number of shares are consolidated into a single share (e.g., in a 1-for-10 reverse split, ten shares are converted into one share). The result is an increase in the per-share price of the consolidated shares, such that, following the reverse split each stockholder maintains its approximate proportionate ownership, but the issuer has fewer shares outstanding at a higher price per share. Issuers tend to use reverse stock splits to increase their share price to, among other things, meet the Exchanges’ minimum listing requirements and attract investors. ⁶

When reverse splits do not evenly divide the number of shares an investor holds, the result is a fractional share. Fractional shares are vested proportionally with the same rights as full shares. This can create administrative difficulties, especially when it comes to corporate governance and issuing dividends. ⁷ As a result, issuers tend to avoid creating fractional shares when they effect a reverse split. In the 36 states that have adopted the Model Business Corporation Act, companies can avoid issuing fractional shares by (1) paying in cash the value of fractions of a share; (2) issuing scrip that entitles the holder to receive a full share upon its surrender; or (3) disposing of the fractional shares and paying the proceeds to the holder of those shares. ⁸ The remaining 14 states have adopted laws that provide companies with substantially similar choices. ⁹

Recently, issuers have shown a preference for the second option and are “rounding up” fractional shares. As discussed, in theory this approach protects the interests of existing shareholders by maintaining the proportionality of their shareholder rights. In recent years, however, this investor-focused practice has been abused by some individuals, which has added to the complexity of the settlement process for these shares, creating unnecessary risks for issuers, shareholders, and broker-dealers alike.

Pursuant to the rules of each individual listing exchange, issuers must provide advance public notice prior to effecting a reverse stock split. ¹⁰ As a result of this required disclosure, the public is aware of the existence of a pending reverse stock split and the method by which an issuer plans to handle any fractional shares remaining at the time of the split. Recently, SIFMA members have observed with increased frequency instances in which individual investors pursue a novel trading practice designed to profit from the “round-up” treatment of fractional shares in reverse stock splits. In this novel trading practice, an investor will purchase issuer shares ahead of a reverse stock split understanding that any post-split fractional share will be rounded-up to a single share. ¹¹ After the reverse stock split is effected, the investor sells their single share at a profit based on the increase in the issuer’s stock price caused by the reverse stock split.

The mechanics of this practice are described in detail on social media, websites, and online message boards, which has contributed to an increase in the number of individual investors purchasing small amounts of the issuer’s security shortly ahead of each reverse stock split. These sites also often contain detailed descriptions regarding various broker-dealers’ responses to this trading activity.

SIFMA members have also observed recent instances where Exchange-listed issuers publicly announce how they will treat fractional shares post-split (as required), but after the announcement, do not adhere to or change terms of treatment for fractional shares. For example, an issuer may publicly announce that, post-reverse stock split, they will (1) issue pro-rata cash payments for any fractional shares or (2) round-up fractional shares. After the split, issuers may be unprepared for the number of fractional shares purchased between the announcement and the date of the reverse stock split and refuse to (1) pay broker-dealers the amount required for a broker-dealer to purchase the shares owed to the broker’s end customers/issuer’s stockholders or (2) refuse to deliver the resulting shares. ¹²

Currently, the Exchanges’ rules do not prohibit issuers from doing this, even after the announced effective date.

Broker-dealers face significant operational challenges when an issuer does not adhere to previously announced terms regarding a reverse stock split. For example, many of the individuals who purchase fractional shares ahead of a reverse stock split are unfamiliar with the settlement process and fail to realize that the value of the rounded-up share in their account is merely a credit that will be delivered at a later date. As a result, they may use or withdraw the value from the trade. When this occurs, the broker-dealer may need to buy-in the issuer’s share to cover the customer’s position. While waiting for the issuer to deliver the share, the customer’s position may become short. If the issuer decides to change the terms of the reverse split, the cash paid in lieu of the original fractional share likely will not be enough to cover the short.

Even in instances when issuers adhere to the announced terms of a reverse stock split, broker-dealers incur significant operational challenges and risks as they work with transfer agents to ensure that fractional shares are accurately rounded-up or paid for pursuant to the terms of the issuer’s public announcement, allocated to their customers and settled in a timely manner. When this process is disrupted, it can result in investor confusion and complaints, regulatory scrutiny, litigation, and increased operational burdens and risks for broker-dealers.

To address the issues described above, we encourage the Exchanges to (1) work with issuers, registered clearing agencies, and transfer agents to bring more attention to the challenges raised by reverse stock splits, particularly those with a fractional share round-up and (2) propose rules to enhance the transparency, predictability, and enforceability of the treatment of fractional shares when issuers conduct reverse stock splits to ensure that issuers adhere to announced terms, and maintain fairness in the treatment of fractional shares.

2. SIFMA Recommendations for Exchange-Listed Issuers Engaging in Reverse Stock Splits

(a) The Exchanges may consider educating issuers on reverse stock splits and either adopt rules requiring them to adhere to publicly announced terms or explore alternative approaches that achieve the same objectives.

• Exchanges may consider educating issuers on risks, enforce stricter policies on the handling of fractional share amounts, and collaborate with regulators to strengthen oversight. Without action, issuers and investors will face continued dilution, eroding market confidence.
• SIFMA recommends that the Exchanges consider not permitting an issuer to change their publicly announced reverse stock split terms. Issuer changes to announced reverse stock split terms generate significant shareholder confusion and diminish trust in the marketplace.
• If an exchange-listed issuer must change the terms of their previously announced reverse stock split, SIFMA members believe that the Exchanges should allow an acceptable time frame, e.g., at least 72 hours for details to be amended before the terms are effective to provide the marketplace ample opportunity to absorb the change and act accordingly.

(b) Issuers should provide clearer communications on reverse stock splits.

• Issuers should clearly outline the terms of reverse stock splits, including the treatment of fractional shares, in all public announcements and SEC filings. Transparency of the terms of reverse stock splits helps to ensure that shareholders understand the implications for their purchases and holdings.
• Issuers should explicitly describe the impact of the reverse stock split on both registered and beneficial holders. Clear guidelines will minimize discrepancies and confusion among participants, because clear guidelines will prevent potential arbitrage opportunities, reduce administrative errors, and enhance investor confidence in corporate actions. This will ensure shareholders, whether registered holder or beneficial holder, will receive fair and consistent treatment, and prevent the current practice of registered holders being subject to the rounding terms of the event while beneficial holder shares potentially being treated differently.
• Issuers should use clearer and “plain English” language to describe the intended rounding methodology for fractional shares, ensuring that investors and broker-dealers have a uniform understanding of the process.

(c) The Exchanges should work with market participants, particularly central clearing parties, and transfer agents, to promote consistency in how reverse stock splits with fractional shares are managed.

• Across market participants, there are differences in how reverse stock splits with fractional shares are managed, with fractional shares often treated differently at the start and end of the process. At the start of the process, brokers and transfer agents may apply different rounding conventions, determining whether shares are rounded up, down, or converted to cash. By the end of the process, disparities in execution, such as how cash in lieu payments are calculated or when they are distributed, can lead to inconsistencies in shareholder treatment.
• Rounding practices, typically applied at the Depository Trust and Clearing Corporation (“DTCC”) participant level, create challenges when extended to the beneficial holder level, allowing market participants to exploit the rules and reconcile discrepancies later.
• Rounding up at the beneficial holder level creates incentives to purchase more shares, leading to unintended economic consequences and is detrimental to the very purpose of the split. SIFMA recommends eliminating rounding at the beneficial holder level, standardizing fractional shares as cash in lieu payments, enhancing clarity for issuers and consistency in share handling, and implementing separate payment processes for registered holders to reduce discrepancies in share allocation, payout calculations, and timing between registered and beneficial holders. These changes will improve transparency, reduce operational complexity, and mitigate economic risks.
• When registered holders and beneficial holders are treated the same, it creates operational and market complexities and is not in the best interest of the issuer and shareholder’s long-term value. This is because brokerage firms and transfer agents process transactions differently, leading to inconsistencies in fractional share payouts, delays in settlements, and potential arbitrage opportunities that can distort market pricing. Establishing distinct processes for each category ensures smoother execution, reduces administrative burdens, and maintains fairness for shareholders.
• SIFMA members suggest that the Exchanges consider eliminating the ability for fractional shares to be rounded up in a reverse stock split and instead any fractional shares held post-split should compensated with cash in lieu of fractional shares.

3. Risks

As identified above, reverse stock splits present risks to a broad spectrum of market participants. We specifically highlight these risks below.

(a) Risks to Retail Investors

Retail investors face significant disadvantages when reverse stock splits and fractional share treatments are not managed transparently and equitably. Lack of clarity and failure to adhere to publicly announced terms can confuse investors and diminish their confidence in the capital markets. To promote market integrity, we encourage the Exchanges to consider policies that reinforce the importance of issuers adhering to their announced reverse stock split terms. Clear expectations and potential consequences for changes after public disclosure could help ensure consistency and fairness for all market participants.

(b) Risks to Issuers

Reverse stock splits, as currently implemented, can have negative consequences for issuers. ¹³ These consequences include litigation risk and regulatory scrutiny when shareholders are significantly diluted or there is a significant change in the price of the share after a reverse split with a round-up provision. Similar risks can emerge if an issuer fails to adhere to the publicly announced terms of a reverse split, which generates shareholder confusion and complaints. Additionally, issuers often face significant challenges reconciling discrepancies caused by inconsistent handling of fractional shares across different participant levels. Further, poor communication and lack of clarity regarding reverse stock split terms can diminish investor trust and damage the issuer’s reputation in the market.

(c) Risks to Broker-Dealers

Broker-dealers face significant operational burdens and risks when reverse stock splits are not executed with transparency and consistency. The need to resolve shareholder complaints, address regulatory inquiries and litigation, and manage inconsistent terms increases operational risks and costs, as well as the potential for reputational harm, and diverts resources from other priorities. Clear and consistent guidelines from the Exchanges would alleviate these challenges and promote a more efficient marketplace.

4. Conclusion

We sincerely appreciate the Exchanges’ consideration of this important matter. By taking into consideration the points outlined above, the Exchanges can foster a more balanced and effective framework of reverse stock splits and fractional shares for market participants. The Exchanges are encouraged to implement measures that enhance issuer awareness of these risks through education and guidance, standardize practices for fractional share handling to promote fairness and consistency, and clearly communicate the impact of reverse stock splits on retail investors, broker-dealers, and issuers. These measures will protect retail investors, reduce operational burdens and risks for broker-dealers and issuers, and promote a fair and transparent market environment.

Sincerely,

Stephen Byron

Managing Director

Head of Operations, Technology, Cyber & BCP

SIFMA

Anthony Macchiarulo

Assistant Vice President, Financial Services Operations & Assistant General Counsel

SIFMA

cc: Ann Marie Bria, Managing Director, DTCC