SFC consults on market sounding guidelines

In view of the significance of market soundings in gauging the interest of investors and to ensure a level playing field of all parties involved, the Securities and Futures Commission of Hong Kong, SFC, has launched a consultation on proposed new guidelines for market soundings. The launch comes after a review of market conduct of involved intermediaries and the SFC’s concerns over inside information leaking during market soundings. Therefore, the proposed new guidelines are aimed at providing clarity as to the SFC’s regulatory expectations in relation to market soundings, deterring misconduct, and assisting market „intermediaries in upholding market integrity during market soundings“. It shall be noted in this context, that the term „intermediaries“ is thereby used for both (legal) persons acting on behalf of a client, issuer, or shareholder in gauging the interest of potential investors AND for potential investors towards which market soundings are addressed. It should also be noted that the scope of the proposed guidelines would extend to all communications gauging investor interest in a potential transaction where non-public information is disclosed, regardless of whether such information is price-sensitive or would be considered „inside information“.
##### The guidelines would consist of the following:
(1) Market soundings principles which would apply to both sell and buy side parties stipulating some basic (conduct) requirements when engaging in market soundings;
(2) Requirements on sell side intermediaries only; and
(3) Requirements on buy side „intermediaries“ of market soundings (investors).
#### (1) Proposed market sounding principles
Core Principle 1 – Market Integrity
An essential tenet of market integrity for a market sounding intermediary is to uphold strict confidentiality standards. Specifically, it must refrain from trading on or leveraging any non-public information acquired or shared during market soundings for personal gain or to benefit others until such information becomes publicly available.
Core Principle 2 – Governance
A market sounding intermediary should establish robust governance and oversight mechanisms for its market sounding activities. This includes appointing a committee or individuals sufficiently independent from the „front-office“ to oversee market soundings in support of senior management’s supervisory role, as well as setting forth clear procedures and expectations for conducting these market soundings.
Core Principle 3 – Policies and Procedures
To maintain market integrity, a market sounding intermediary must devise and maintain effective policies and procedures that dictate how market soundings should be carried out. This encompasses outlining specific procedures for conducting market soundings, defining roles and responsibilities, and implementing restrictions to prevent both the firm and its staff from improperly using non-public information associated with market soundings.
Core Principle 4 – Information Barrier Controls
In pursuit of market integrity, a market sounding intermediary should put in place sufficient and effective physical and electronic controls for information barriers. These controls are designed to prevent the inappropriate disclosure, misuse, or inadvertent leakage of non-public information during market soundings. This includes establishing principles for sharing information among staff and tracking individuals who have accessed non-public information as a result of market soundings.
Core Principle 5 – Review and Monitoring Controls
To uphold market integrity, a market Sounding Intermediary must establish procedures and controls that are effective in monitoring and identifying suspicious or inappropriate behaviors, as well as unauthorized disclosure or misuse of information related to market soundings. This includes conducting periodic reviews and implementing surveillance controls for trade and communication activities.
Core Principle 6 – Authorized Communication Channels
In adherence to market integrity, a market sounding intermediary should exclusively employ recorded communication channels that have received authorization from senior management or independent functions for the purpose of conducting market soundings.
#### (2) Specific requirements for sell side intermediaries:
Before conducting a market sounding, sell side intermediaries would have to identify a standard set of information to be disclosed during the market sounding and evaluate this information and have it reviewed by senior management or an independent control function. Furthermore, the intermediary would have to obtain consent from the market sounding beneficiary to proceed with the market sounding. Moreover, intermediaries would have to plan the timing of the market sounding (ideally after trading hours and as close as possible to the deal launch) and limit the number of potential investors involved in the market sounding to a level necessary for assessing investor interest.
Intermediaries would also be required to use a standardized script for all market sounding communications, including statements about confidentiality, recording and wall-crossing consent. The script has to be regularly reviewed by senior management or an independent control function. If the information in a market sounding is becoming public, an intermediary must also notify the potential investor of this fact.
Finally, intermediaries would be required to maintain records related to market soundings for a minimum of seven years. These records should include:
– The consent from the market sounding beneficiary to conduct the market sounding.
– A list of potential investors who declined to receive non-public information.
– Documentation of the market sounding, which may include audio, video, or text recordings.
– Records of assessments, discussions with the market sounding beneficiary, and conclusions about the non-public nature of the information disclosed.
– A list of all individuals, both internal and external, who received or had access to the non-public information.
– Notifications to potential investors in view of information that has become public.
#### (3) Specific requirements for buy side intermediaries:
The recipient of market soundings (investor or person acting on his or her behalf) would also be required to keep on record for seven years any communication relating to market soundings, including notifications of the desire to receive market soundings, records of the market soundings, and a list of individuals with access to non-public information resulting from the market sounding.
Also, the recipient would have to designate specific individuals to receive market sounding requests, inform the sell side intermediary of the arrangements, and confirm designated persons when contacted for a market sounding.