The Securities and Futures Commission (“SFC“) is seeking public input on proposed guidelines to regulate market soundings, which are pre-transaction communications used by market participants to gauge investor interest and assist in determining transaction details.

The below summarises the SFC’s proposed guidelines:

Definition

• Market sounding involves the communication of non-public information, regardless of its price-sensitive nature, with potential investors prior to announcing a securities transaction.
• It aims to gauge investor interest and determine transaction specifications, such as size, pricing, structure, and selling method.
• Market sounding is conducted by licensed or registered individuals, acting as “Market Sounding Intermediaries”, which include the Disclosing Person sharing information and the Recipient Person receiving it

Carve-outs

The guidelines do not apply to communications regarding:

• speculative transactions or trade ideas proposed without consulting the potential Market Sounding Beneficiary[1] or lacking certainty;
• transactions in size, value, structure or selling method commensurate with ordinary day-to-day trade execution; and
• public offerings of securities.

Core Principles for Market Sounding Intermediaries

1. Market integrity.
2. Robust governance.
3. Effective policies and procedures specifying expectations in conducting market soundings.
4. Adequate physical and electronic information barriers.
5. Review and monitoring controls to detect suspicious behaviours, unauthorized disclosure, or information misuse.
6. Utilise senior-approved recorded communication channels

Obligations of Disclosing Persons

• Pre-sounding procedures: Assess if disclosed information is non-public, obtain the Market Sounding Beneficiary’s consent for market soundings and determine disclosure details for recipients.
• Standardised script: Use an approved script, and provide written confirmation to the Recipient Person summarising content of the market sounding communications.
• Cleansing: Determine whether information ceased to be non-public and inform the Recipients Person accordingly.
• Record keeping: For at least seven years.

Obligations of Recipient Persons

• Handling of market sounding requests: Designate trained person(s) to receive market soundings, and inform the Disclosing Person his preference for receiving market soundings.
• Record keeping: For at least seven years.

The SFC’s proposals will undergo a 2-month public consultation, with the final guidelines taking effect upon gazettal. A further 6-month transition period will be provided for industry compliance.

These guidelines aim to address divergent practices, promote market integrity, and establish standards. Market participants and interested parties are encouraged to offer feedback on the proposed guidelines.

Access the full consultation paper here for more details.

[1] Market Sounding Beneficiary means a client, an issuer or an existing shareholder selling in the secondary market.