Hong Kong Proposes Guidelines for Market Soundings

By: Carolyn Sng and Tan Choo Lye

The Securities and Futures Commission (SFC) of Hong Kong is consulting on new guidelines to regulate market soundings in advance of transactions such as private placements and block trades. Market soundings are the communication of non-public information (whether price-sensitive or not) with potential investors prior to the announcement of the transaction to gauge investor interest or assist in determining the specifications of the potential transaction. It can be an integral part of price discovery, but the process may be open to abuse if parties trade on the back of non-public information obtained.

The UK, EU and Australia have existing guidelines for market soundings, and in those jurisdictions compliant market soundings are deemed not to be unlawful disclosure of inside information. But Hong Kong currently regulates market soundings with insider dealing laws and general intermediary codes of conduct rather than specific regulations.

The proposed new guidelines include requirements for the intermediaries to maintain strict confidentiality and not use or trade on the non-public information, implement governance and internal controls for the conduct of market sounding and maintenance of information barriers, and adopt a standardized script for market soundings and procedures for cleansing non-public information. There are requirements for both the buy-side and sell-side intermediaries. The guidelines will not apply to speculative soundings without a mandate or public offerings.

Part of the context for the proposals is to clarify that market sounding safeguards should apply to all non-public information even if outside the scope of inside information under insider dealing laws. The SFC specifically referenced a recent Securities and Futures Appeals Tribunal determination involving trading on the back of non-public information that was not insider dealing in Hong Kong as the securities were listed overseas, but was held to constitute a breach of the codes of conduct. However, the SFC announced on 8 August 2023 that the insider dealing offence will be expanded to include overseas listed securities, which would address this concern. It is unclear what circumstances involving communication of non-public information, not constituting inside information (as expanded by the proposed reforms) should be caught by the proposed new market sounding guidelines.

The consultation period closes on 11 December 2023.