Deadline approaches to comply with new SFC market sounding guidelines

27 November 2024 | Asia | Articles

A two-month public consultation on the Proposed Guidelines for Market Soundings was initiated by the SFC in October 2023, These guidelines aimed to help intermediaries comply with the principle of conducting honest business activities and protecting clients, while maintaining market integrity during market soundings. Now that the consultation results have been published, licensed or registered companies in Hong Kong have six-months to enhance their systems, policies and procedures to ensure compliance with the guidelines.

Proposed scope of application

According to the SFC’s guidelines, a “market sounding” refers to “the communication of information with potential investors, prior to the announcement (if any) of a transaction, to gauge their interest in a possible transaction and assist in determining the terms and specifications related to it, such as its potential timing, size, pricing, structure, and trading method”.

The guidelines only apply to:

1. market soundings conducted in connection with a possible transaction in:
   (i) shares that are listed on an exchange; and
   (ii) any other securities which is likely to materially affect the price of shares that are listed on an exchange; and
2. a licensed or registered person who:
   (i) discloses confidential information that is entrusted to it by a client, an issuer or an existing shareholder selling or buying in the secondary market (Market Sounding Beneficiary) during a market sounding (Market Sounding Information) (Disclosing Person); or
   (ii) receives Market Sounding Information during a market sounding (Recipient Person)
   collectively referred to as a Market Sounding Intermediary.

The guidelines is applicable to Market Sounding Intermediary who conducts market sounding activities in Hong Kong. The SFC also expects the Market Sounding Intermediary to be responsible for compliance with the guidelines where the market sounding activity is conducted by an overseas affiliate or group company for, or on behalf of, or as delegated by such intermediary.

The guidelines should be read in conjunction with, among other provisions, General Principles 1, 2, and 6 and paragraph 9.3 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission as well as paragraph 1.3 of the Fund Manager Code of Conduct.

Proposed core principles for both Disclosing Persons and Recipient Persons

A Market Sounding Intermediary is required to:

• protect Market Sounding Information and safeguard its confidentiality
• ensure there is an effective system of functional barriers to prevent inappropriate disclosure, misuse and leakage of Market Sounding Information
• designate a committee or person(s) with adequate knowledge of its internal policies and procedures governing market soundings to monitor market soundings in support of senior management’s oversight
• have policies and procedures to identify and handle Market Sounding Information
• implement robust procedures and controls to identify and monitor suspicious activities, misconduct, or unauthorised handling of Market Sounding Information.

Proposed specific requirements for Disclosing Persons

Before reaching out to Recipient Persons or potential investors for market sounding, a Disclosing Person must:

• secure agreement or consent from the relevant Market Sounding Beneficiary to proceed with the market soundings
• determine a standard set of information to be disclosed, the appropriate timing to conduct market soundings and a suitable number of Recipient Persons or potential investors to contact
• use authorised communication channels (e.g. record phone lines, audio, video or text, etc.)
• use a standardised script to prevent inappropriate disclosure of Market Sounding Information but they have the flexibility to create their own scripts so long as they meet the minimum content requirements outlined in the guidelines
• maintain the list of internal and external individuals who possess Market Sounding Information
• confirm that the recipient is authorised to receive Market Sounding Information, if applicable (verifying the individual’s identity isn’t necessary).

Proposed specific requirements for Recipient Persons

• Authorise someone knowledgeable about internal policies for receiving and handling Market Sounding Information.
• The authorised person does not need to be independent from the front office.
• Inform Disclosing Persons about the authorised individual upon being contacted by Disclosing Persons for the purpose of market soundings and whether it wishes to receive Market Sounding Information.
• If a Disclosing Person does not clarify the nature of the communication, the Recipient Person should make reasonable efforts to verify whether it is Market Sounding Information.

Record keeping

• Apply the communication and record-keeping requirements solely to Disclosing Persons with the record retention period reduced from seven to two years.

The guidelines will become effective six months from the gazettal date (i.e. on 2 May 2025). Once they take effect, Market Sounding Intermediaries that haven’t completed the corresponding enhancements should implement interim measures to meet the objectives of the guidelines. Licensed or registered persons therefore have a six-month transitional period to review and, if necessary, adapt their existing policies and procedures to identify and handle Market Sounding Information. Practical guidance has been provided to Market Sounding Intermediaries by way of FAQs.

How can Bovill Newgate help you meet the SFC’s market sounding objectives?

We can help you understand the new guidelines by assessing your current practice, developing policies and procedures, and assisting you in implementing the compliance framework.

By leveraging these services, you can effectively navigate the complexities of the guidelines, making sure your business stays compliant and reducing the risk of regulatory issues.