A reminder on SFC market sounding guidelines for block trades (Hong Kong)

Core Principles under the Guidelines

Handling of Information

Intermediaries should safeguard the confidentiality of market sounding information (“MSI”)⁵ and ensure effective systems of functional barriers are in place to prevent inappropriate disclosure, misuse and leakage of such information.

Governance

Intermediaries should establish a robust governance and oversight framework to supervise market sounding activities.

Policies and Procedures

Intermediaries should establish and maintain effective policies and procedures with respect to market sounding activities.

Review and Monitoring Controls

Intermediaries should implement surveillance controls to monitor and detect suspicious behaviours, misconduct, unauthorized disclosure, misuse or leakage of MSI, and non-compliance with internal policies.

Specific Requirements for Disclosing Persons

Procedures Before Conducting Market Soundings

Before initiating contact with potential investors, Disclosing Persons must:

• obtain agreement or consent from the Market Sounding Beneficiary.
• determine a standard set of information to be disclosed consistently to all Recipient Persons, the appropriate timing for market soundings (e.g. as close as reasonably practicable to the time of launch of transaction and outside of trading hours), and the suitable number of Recipient Persons to contact such that its market soundings are limited to as few Recipient Persons as it deems reasonably necessary.

Use of Authorized Communication Channels

Disclosing Persons should:

• use only communication channels authorized by senior management or Legal and Compliance team.
• record conversations using telephone recording systems or other recorded communication channels.
• use other recording formats (e.g. written minutes) only if the telephone recording system or other recorded communication channels are unavailable.

Standardized Script

A standardized script, pre-approved and regularly reviewed by senior management or Legal and Compliance team, should be used during market sounding communications. The script must at least include the following sequence of information:

• an opening statement indicating the call’s purpose as a market sounding and confirming the individual is authorized to receive market soundings.
• a request for consent to record the conversation.
• a request for consent to receive, safeguard, and prevent misuse or leakage of MSI.

If these consents are not obtained, the Disclosing Person should not provide the MSI. 

Any preliminary information provided to help the recipient decide whether to give consent must be on a no-name basis and sufficiently broad, limited and vague to ensure a reasonable person would not be able to deduce the name of the subject security (and special care must be taken for narrow industry sectors). Specific information such as market capitalisation, market volumes or market prices of the subject security should not be provided before obtaining such consent.

After obtaining consent, the Disclosing Person should send a written confirmation to the Recipient Person, summarizing the market sounding contents.

Record Keeping

Disclosing Persons are required to maintain records of its market soundings for at least two years, which should include: 

• consent from a Market Sounding Beneficiary to engage in market sounding.
• a list of Recipient Persons or potential investors who declined market soundings.
• audio, video, or text records of market soundings conducted through recorded channels.
• written minutes of market soundings conducted through unrecorded channels.
• a list of internal and external persons who possess MSI, including details on the date and time of sounding, name and contact details of persons sounded, information and materials disclosed and all relevant consents obtained.

Specific Requirements for Recipient Persons

Handling of Market Sounding Requests

Recipient Persons should:

• authorise an individual who is familiar with its internal policies to handle market soundings and notify Disclosing Persons of such arrangement when contacted.
• inform Disclosing Persons whether they wish to receive market soundings for all or specific types of transactions.
• use reasonable effort to verify if it possesses MSI where a Disclosing Person does not specify whether a communication is a market sounding.

Key Clarifications in Frequently Asked Questions

Compliance with Guidelines by Overseas Affiliates or Group Company

When entities operate in overseas jurisdictions, they must adhere to the legal and regulatory requirements of those jurisdictions. However, if the market sounding activity is conducted by an overseas affiliate or group company for or as delegated by an intermediary in Hong Kong, the intermediary will be responsible for compliance with the guidelines.

Continuation of the obligation to safeguard MSI

An intermediary’s obligation to safeguard MSI ends when it no longer has a duty of confidentiality. This typically occurs when the associated transaction has either materialized (execution is in progress or completed) or not materialized (cancelled, no longer pursued, or delayed without a concrete or foreseeable timeline). Intermediaries are encouraged to maintain clear communication to determine if they remain subject to confidentiality. Good practices to be adopted by an intermediary include:

• proactively notifying all recipients when the transaction status is concluded.
• keeping regular contact with Market Sounding Beneficiaries to confirm the transaction status.
• agreeing in advance with Market Sounding Beneficiaries and Recipient Persons on a timeframe after which MSI is no longer confidential due to passage of time (ie. the deal can be considered “dead” if not confirmed within a period of time).