The Securities and Futures Commission of Hong Kong (SFC) published today revised “market sounding” guidelines, together with practical FAQs, responding to concerns expressed by industry associations that the proposals were out of step with practices in other international financial markets and risked having a chilling effect on capital raisings conducted in Hong Kong.
The refined guidelines cut back on proscriptive rules that would have prohibited trading involving all types of securities based on any nonpublic information disclosed or received during soundings. This article summarizes the main regulatory expectations and requirements for Hong Kong–regulated intermediaries who participate in market soundings intended to gauge potential investors’ interest in possible block trades or private placements.
Type of information and securities in scope
The revised guidelines make it clear that the proposals only apply to (i) confidential information in connection with possible transactions in listed securities regardless of the listing venue or (ii) transactions involving other securities that are likely to materially affect the price of listed securities. In other words, market participants should apply the “confidentiality” test for market soundings involving listed securities and the “price-sensitivity” test for market soundings involving any other securities.
Examples of information that would be regarded as “confidential” for market soundings involving securities listed in Hong Kong or elsewhere include (i) the name of the security (or specific information that would allow the recipient to deduce the security), (ii) the identity of the market-sounding beneficiary (e.g., the name of the substantial shareholder disposing of its shares), (iii) the purpose of the transaction (e.g., a sell-down of a substantial shareholder’s stake in the security), and (iv) the terms or specifications relating to the transactions (e.g., potential timing, size, pricing, structure, and trading method).
Restrictions on trading or use of nonpublic information
While buy-side firms do not need to automatically restrict trading following mere receipt of nonpublic information, the SFC reiterated that it expects firms to safeguard the confidentiality of market-sounding information and ensure there are effective barriers to prevent inadvertent disclosure, misuse, or leakage of confidential information (regardless of whether it is price sensitive or constitutes inside information). The SFC therefore dismissed concerns that the rules create a new form of market misconduct or indirect expansion of the insider dealing regime without statutory backing simply because buy-side firms are required to restrict trading following receipt of confidential information (even if it was not inside information). It stressed that firms can still engage in legitimate trading activities after participating in a market sounding as long as effective information barriers are in place to prevent inadvertent disclosure, misuse, or leakage of confidential information.
Specific requirements for disclosing persons
The revised guidelines put the burden on sell-side brokers to use standardized scripts (in line with existing best practices) and ensure that any preliminary information provided to the buy-side firm before it agrees to participate is on a “no-name” basis and sufficiently broad, limited, vague, and anonymized to ensure that recipients will not be able to deduce the name of the subject security.
In addition, the revised guidelines require sell-side brokers to maintain a list of internal and external individuals who possess nonpublic information because of market soundings. It also relaxes the obligation for sell-side brokers to determine whether nonpublic information disclosed during market soundings has been cleansed. In line with existing market practices, nonpublic information will cease to be treated as confidential when a buy-side recipient (i) is notified of a change of status of the transaction (e.g., completed, suspended, postponed, or cancelled), (ii) given advance notice that the information will become “stale” if no status updates are received within a prescribed time period (e.g., a certain number of hours or days), or (iii) agrees up-front on when the duty of confidentiality will end.
Recordkeeping
Taking into account practical challenges and potential costs, the revised guidelines place the burden on sell-side brokers to use authorized recorded communication channels for market soundings and shorten the recordkeeping requirements to two years (from seven years).
What happens next
The revised market-sounding guidelines are due to take effect on May 2, 2025. Regulated buy-side managers 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. However, the SFC signaled that simply because the new guidelines apply to Hong Kong–licensed intermediaries does not mean that persons involved in market soundings who are not SFC licensed are immune from potential liability. Rather, the SFC cautioned that unregulated persons remain subject to the relevant laws and regulations concerning insider dealing.
If you would like to discuss the expected standards of conduct, revamp your written procedures, or explore how we may be able to assist you, please do not hesitate to contact us.
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