Overview Of SFC's Guidelines For Market Soundings

Introduction

The Securities and Futures Commission (the "SFC") has introduced the Guidelines for Market Soundings (the "Guidelines") which took effect in May 2025. The Guidelines establish clear regulatory expectations on how licensed and registered persons should conduct pre-transaction consultations with institutional investors. "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. Market soundings are typically conducted connection with capital market transactions, such as private placements and "block trades".

Key terms used in the Guidelines

Before we go on to the core requirements of the Guidelines, it is important to first set out the definitions of some key terms used in the Guidelines:

• Disclosing Person: Generally a sell-side broker that is sounding out potential investors, on behalf of a Market Sounding Beneficiary (i.e. an issuer or an existing shareholder selling or buying in the secondary market), about a possible transaction.
• Recipient Person: Generally a buy-side firm that is sounded out by a Disclosing Person as a potential investor in a possible transaction.
• Market Sounding Intermediary: Means the Disclosing Person and Recipient Person.
• Market Sounding Beneficiary: Generally refers to a client, an issuer or an existing shareholder selling or buying in the secondary market.
• Market Sounding Information: Generally refers to confidential information that is entrusted by a Market Sounding Beneficiary during the course of a market sounding.

Core principles for both Disclosing Person and Recipient Persons

The Guidelines set out 4 core principles for both disclosing person and recipient persons as follows:

1. Handling of information: A Market Sounding Intermediary should implement and maintain robust systems to protect confidential information, including and not limited to functional and physical segregation barriers, clear information processes, restricting information to authorized personnel on a "need-to-know" basis.
2. Governance: A Market Sounding Intermediary should have robust governance and oversight arrangements to ensure effective management supervision over its market sounding activities. Such arrangements include (i) senior management assuming overall responsibility for the oversight of market soundings and their related risks and outcomes; (ii) establishing appropriate governance arrangements for market soundings; (iii) designating a committee or person(s) with roles, responsibilities and reporting lines clearly defined, to monitor market soundings in support of senior management's oversight; and (iv) developing and implementing appropriate managerial and supervisory processes, procedures and control measures to ensure that market sounding matters are promptly brought to the attention of senior management and designated committee or persons(s) for review and follow-up actions to be taken.
3. Policies and procedures: A Market Sounding Intermediary should establish and maintain effective and robust policies and procedures specifying the manner and expectation in which its market soundings should be conducted. These should be documented in writing, reviewed periodically and updated where necessary.
4. Review and monitoring controls: A Market Sounding Intermediary should establish effective procedures and controls to monitor and detect suspicious behaviours, suspected misconduct, inappropriate or unauthorised disclosure, misuse or leakage of Market Sounding Information and non-compliance with internal guidelines related to market soundings.

Specific Requirements for Disclosing Persons

The Guidelines set out specific requirements for Disclosing Persons as follows:

• Procedures before conducting market soundings: Before initiating market sounding, Disclosing Persons should obtain agreement or consent from the Market Sounding Beneficiary, and determine in advance, on a case-by-case basis, a standard information set for disclosure, appropriate timing for soundings (preferably close to transaction launch and outside trading hours), and suitable number of recipients limited to those reasonably necessary for gauging interest.
• Use of authorized communication channels: A Disclosing Person should only use communication channels authorised by senior management or legal and compliance functions. Where market soundings are conducted by telephone, a Disclosing Person should use a telephone recording system.
• Standardised script: A Disclosing Person should adopt the use of a standardised script pre-approved and regularly reviewed by senior management or legal and compliance functions during market sounding communications. Such script should at least include opening statements identifying the communication as market sounding, and a request for consent from the Recipient Person or other potential investor. After obtaining all relevant consent, a Disclosing Person should provide a written confirmation to the Recipient Person or other potential investor as soon as possible, summarising the contents covered in its market sounding communications.
• Record keeping: A Disclosing Person should keep records in relation to its market soundings for a period of not less than 2 years in such manner as will enable them to be readily accessible. Such records typically include agreement or consent obtained from the Marketing Sounding Beneficiary, a list of Recipient Persons who have informed the Disclosing Person that they do not wish to receive any market soundings, recorded audio, video or text, written minutes of market soundings conducted through unrecorded communication channels, and a list of all internal and external persons who possess Market Sounding Information.

Specific Requirements for Recipient Persons

According to Guidelines, a Recipient Persons should:

1. authorise a person who has adequate knowledge of its internal policies on the receipt and handling of market soundings, and inform Disclosing Persons of such arrangement upon being contacted by Disclosing Persons for the purpose of market soundings;
2. inform Disclosing Persons whether it wishes to do, or not to, receive market soundings in relation to either all possible transactions or particular types of possible transactions from the Disclosing Persons; and
3. in circumstances when a Disclosing Person does not specify whether the communication is a market sounding, use it reasonable effort to verify whether it is in possession of Market Sounding Information.

Consequences of non-compliance

The Guidelines do not have the force of law and shall not be interpreted in a way which would override the provision of law. While failure by any person to comply with the Guidelines shall not by itself render it liable to any judicial or other proceedings, compliance with the Guidelines should not be neglected. In particular, the Guidelines may be admissible in evidence, and if any provisions set out in the Guidelines appears to the court to be relevant to any question arising in the proceedings, it may be taken into account in determining the question. Furthermore, non-compliance with the Guidelines may cause the SFC to consider whether such failure adversely reflects on the person's fitness and properness to remain licensed or registered. When considering a person's failure to comply with the Guidelines, the SFC will adopt a pragmatic approach taking into account all relevant circumstances, including the size of the Market Sounding Intermediary and any compensatory measures implemented by its senior management.

Conclusion

The Guidelines establish clear and comprehensive standards to Market Sounding Intermediaries. Compliance with the Guidelines is no substitution or defence to one's obligation to comply with the relevant laws and regulations concerning insider dealing. Any person involved in market soundings remains subject to the relevant laws and regulations concerning insider dealing. Market Sounding Intermediaries are reminded to establish and enhance their systems, controls, policies and procedures to ensure full compliance with the Guidelines.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.