The essential matter at hand is whether or not an intermediary is conducting or engaging in a market sounding as an activity. The term MSI is only an acronym used to simplify the phrase ‘confidential information that is entrusted by a Market Sounding Beneficiary during the course of a market sounding’ for ease of reference throughout the context of the Guidelines.

In connection with the above, the Guidelines only apply to market soundings as defined in paragraphs 1.3 and 1.4. Generally speaking, a market sounding would involve the following circumstances:

1. A Market Sounding Beneficiary who is considering whether or not to pursue a ‘possible transaction’ (ie, typically a block trade). To facilitate itself in making such a decision, the Market Sounding Beneficiary has provided an intermediary with certain information about its possible transaction on a confidential basis and instructed, or provided consent for, the intermediary to reach out to potential investors to gauge their interest in the possible transaction;
2. A Disclosing Person, who is acting as the intermediary reaching out to potential investors to gauge their interest in the possible transaction under consideration by the Market Sounding Beneficiary; and
3. A Recipient Person or other potential investor, who is receiving information from the Disclosing Person about the possible transaction under consideration by the Market Sounding Beneficiary.

Information communicated during a market sounding may include:

1. the name of the subject security (or specific information about the subject security¹);
2. the identity of the Market Sounding Beneficiary;
3. the Market Sounding Beneficiary’s intent to pursue a possible transaction; or
4. the terms of or specifications related to the possible transaction such as its potential timing, size, pricing, structure and trading method.

Communications between intermediaries and their clients are often interactive and fluid. They may be initiated by different parties and may occur in different forms, eg, face to face communication, phone conversation, electronic communication or a combination of any such forms. In determining whether it is conducting or engaging in a market sounding, an intermediary should consider the facts and circumstances of each case and apply the general principles set out above.

¹ See Note 2 of paragraph 3.3(b) of the Guidelines.

Generally speaking, the aim of a market sounding is to reach out to selected investors on a confidential basis to gather information and feedback from them that will help a Market Sounding Beneficiary to determine whether or not to proceed with a possible transaction and how to structure it.

In contrast, if there is an actual order placement by a client (eg, including day-to-day working orders), the ensuing conversations between intermediaries and investors are for the purpose of execution of that client order instruction. Such conversations are not market soundings and thus do not fall within the scope of the Guidelines.

Other examples of conversations that are not typically associated with market soundings may include:

1. Generic discussions about public information, market trends and sentiments, or other anecdotal or unverified information (eg, rumours).
2. Trade ideas put forward by a sell-side broker or reverse-enquiries from a buy-side firm or investor without any indication (eg, acknowledgement, consent, confirmation or mandate) from a Market Sounding Beneficiary to engage potential investors for feedback on a possible transaction.

Paragraph 1.4(a) specifies that the Guidelines will apply to market soundings conducted in connection with a possible transaction in:

1. shares that are listed on an exchange; and
2. any other securities² which is likely to materially affect the price of shares that are listed on an exchange.

As such, the Guidelines will apply if market soundings are conducted in connection with a possible DCM transaction which is likely to materially affect the price of shares that are listed on an exchange.

Part V of the Securities and Futures Ordinance (SFO) mandates licensing for persons carrying on business in a regulated activity³ in Hong Kong. This requirement also applies to individuals who in Hong Kong perform any regulated function⁴ in relation to a regulated activity carried on as a business.

An SFC licence issued under Part V of the SFO only permits holders to carry on business in regulated activities, or to perform a regulated function in relation to the regulated activities carried on as a business, in Hong Kong. The SFO neither requires corporations and individuals to be licensed in relation to activities they conduct outside Hong Kong, nor confers upon them, after being licensed, the ability to conduct business outside Hong Kong. It follows that when corporations or individuals conduct activities in a jurisdiction outside Hong Kong, they have to ensure that the relevant legal and regulatory requirements of that other jurisdiction are fully complied with.

However, if the market sounding activity is conducted by an overseas affiliate or group company for or on behalf of or as delegated by an intermediary, the intermediary will be responsible for compliance with the Guidelines.

The Guidelines are not intended to restrict a Market Sounding Intermediary’s legitimate trading activities. A Market Sounding Intermediary can still engage in these activities as long as effective information barrier controls are in place to prevent inappropriate disclosure, misuse and leakage of MSI.

For example, by restricting MSI only to authorised personnel on a “need-to-know” basis, other personnel of the firm (eg, other staff from trading and investment management functions) may continue to trade on the subject security so long as they are not in possession of the MSI.

The spirit of CP1 is that MSI is protected from deliberate or accidental disclosure, misuse or leakage, both within a firm and its group and externally with respect to third parties. There is no “one-size-fits-all” approach and each firm and its senior management have to decide on the procedures and controls to achieve that objective. Firms should look at the totality of their information-handling procedures and controls to protect MSI in assessing whether, in aggregate, they have an effective system.

Whether a person’s conduct or behaviour would constitute a failure to comply with CP1, or any provision set out in the Guidelines for that matter, would depend on the facts and circumstances of each case. The SFC may consider factors such as:

1. whether MSI was disclosed to any person who did not:
• have a legitimate need to know the information; or
• provide relevant consent to receive the information and safeguard its confidentiality;
2. whether relevant recipients engaged in activities on the basis of MSI received while knowing, or reasonably ought to have known, that the information was confidential; and
3. the conduct and intent of the firm and any individuals in question.

A Market Sounding Intermediary’s obligation under CP1 will end when it no longer has a duty of confidentiality towards the handling, safeguarding or sharing of the subject MSI. Generally speaking, this occurs when the possible transaction associated with the market sounding has:

1. materialised (eg, execution is in progress or completed); or
2. not materialised (eg, cancelled, no longer pursued or delayed without a concrete or foreseeable timeline to pursue the transaction).

Market Sounding Intermediaries are encouraged to have clear and transparent communication with one another to come to an understanding on whether or not they are, and continue to be, subject to a duty of confidentiality.

The following is a non-exhaustive list of examples of good practices adopted by some intermediaries to assist them to determine whether they remain subject to a duty of confidentiality towards MSI. Intermediaries are encouraged to consider whether to adopt any of these practices in their market sounding procedures.

When the status of the associated transaction (ie, whether it has materialised or not) is concluded

1. Some Disclosing Persons would proactively contact all recipients to whom they have disseminated MSI to notify them as soon as the status of the associated transaction has been concluded.
2. Some Recipient Persons would keep regular contact with Disclosing Persons (and likewise for regular contact between Disclosing Persons and Market Sounding Beneficiaries) to follow up on the status of the associated transaction and confirm whether it has been concluded.

When the status of the associated transaction (ie, whether it has materialised or not) is unknown

3. Some Disclosing Persons would agree in advance with Market Sounding Beneficiaries (before commencement of market soundings) and Recipient Persons (during market soundings) on the expected timeframe after which MSI would no longer be considered confidential due to passage of time (ie, the deal can be considered “dead” if not confirmed within a period of time (eg, a certain number of hours or days)).
4. Some Recipient Persons would proactively notify Disclosing Persons (before receiving MSI) of their internal policies regarding timeframe when MSI would no longer be considered confidential due to passage of time and that Disclosing Persons should not share MSI with them if they disagree with the said timeframe.

Disclosing Persons are required only to obtain a confirmation in this regard, but not to verify the person’s identity.

Recipient Persons may make further enquiries with the Disclosing Persons to confirm whether they are conducting a market sounding and whether the information to be shared by them involves MSI, ie, confidential information entrusted to them by the Market Sounding Beneficiaries.