Scope of coverage of the new MS Guidelines

What is market sounding? This refers to the communication of information with potential investors, prior to the announcement of a transaction, to gauge their interest in a possible transaction and assist in determining the terms and specifications related to it. Market soundings are typically conducted in connection with capital market transactions, such as private placements and "block trades".

Which market sounding-related transactions are covered? The MS Guidelines apply to market sounding conducted in connection with a possible transaction in shares listed on an exchange and in any other securities which is likely to materially affect the price of shares listed on an exchange.

What marketing sounding information is covered? This refers to confidential information that is entrusted to a Disclosing Person (see below) by a client, an issuer, or an existing shareholder selling or buying in the secondary market ("Market Sounding Beneficiary") during a market sounding. In determining whether information is "entrusted" to a Disclosing Person, one should consider whether the Disclosing Person has a duty of confidentiality to the Market Sounding Beneficiary. Examples of market sounding information include the following:

1. The name of the subject security (or specific information that would allow that name to be deduced)
2. The Market Sounding Beneficiary's identity
3. The Market Sounding Beneficiary's intent to pursue a possible transaction
4. The terms of or specifications related to the possible transaction (e.g., its potential timing, size, pricing, structure and trading method)

Who must comply? The MS Guidelines apply to SFC licensed or registered intermediaries who:

1. Disclose market sounding information during the course of a market sounding ("Disclosing Person") – e.g., a sell-side broker sounding out potential investors, on behalf of a Market Sounding Beneficiary, about a possible transaction
2. Receive Marketing Sounding Information during the course of a market sounding ("Recipient Person") - e.g., a buy-side firm that is sounded out by a Disclosing Person as a potential investor in a possible transaction,(each a "Market Sounding Intermediary")

Generally speaking, the MS Guidelines apply to market sounding activities conducted in Hong Kong by Market Sounding Intermediaries. However, if an overseas affiliate or group company conducts a market sounding activity for or on behalf of or as delegated by a Market Sounding Intermediary, the Market Sounding Intermediary will be responsible for compliance with the MS Guidelines.

What are the key compliance requirements?

The MS Guidelines cover (a) four core principles (applicable to all Market Sounding Intermediaries), and (b) specific requirements (applicable to a Disclosing Person and a Recipient Person respectively).

Core Principles applicable to all Market Sounding Intermediaries

1. CP1 Handling of information: Market Sounding Intermediaries should protect and safeguard the confidentiality of market sounding information. They should also ensure that there is an effective system of functional barriers to prevent inappropriate disclosure, misuse and leakage of market sounding information.
2. CP2 Governance: Market Sounding Intermediaries should have robust governance and oversight arrangements to ensure effective management supervision over their market sounding activities, including (but not limited to):
   1. Designating a committee / persons with clearly defined roles, responsibilities and reporting lines to monitor market soundings in support of senior management oversight
   2. Developing and implementing managerial and supervisory processes, procedures and controls to ensure that matters related to market soundings are promptly brought to the attention of senior management and designated committee or person(s) for review and follow-up actions, where necessary
3. CP3 Policies and Procedures: Market Sounding Intermediaries should establish and maintain effective policies and procedures specifying the manner and expectations of conducting their market soundings. These should be documented in writing, reviewed periodically, updated where necessary and address, amongst others, market sounding policies, identification and handling of market sounding information, allocation of roles and responsibilities among staff involved in market soundings, escalation protocols and record keeping, etc.
4. CP4 Review and Monitoring Controls: Market Sounding Intermediaries should establish effective procedures and controls to monitor and detect suspicious behavior, suspected misconduct, inappropriate or unauthorized disclosure, misuse or leakage of market sounding information and non-compliance with internal guidelines related to market soundings.

Specific Requirements applicable to Disclosing Persons

Before initial contact with Recipient Persons or other potential investors to conduct market sounding, Disclosing Persons should:

1. Obtain the corresponding Market Sounding Beneficiary's consent to engage in market soundings.
2. Determine in advance, on a case-by-case basis, a standard set of information to be disclosed to Recipient Persons or other potential investors, the appropriate timing to conduct market soundings and a suitable number of Recipient Persons or other potential investors to contact.

In conducting marketing sounding, Disclosing Persons must comply with the following requirements:

1. Perform market soundings only through communication channels authorized by senior management or independent functions (e.g., Legal and Compliance).
2. Adopt standardized script pre-approved and reviewed by senior management or independent functions during market sounding communications (and the script should comply with minimum content requirements specified in the MS Guidelines).
3. Maintain certain records in relation to market sounding prescribed in the MS Guidelines for at least 2 years.

Specific Requirements applicable to Recipient Persons

Recipient Persons are required to:

1. Authorize a person who is familiar with their internal market sounding policies, and inform Disclosing Persons of such arrangement when being contacted by them.
2. Inform Disclosing Persons whether or not they wish to receive market soundings in relation to all or particular types of possible transactions.
3. If a Disclosing Person does not specify whether the communication is a market sounding, use reasonable efforts to verify whether it is in possession of market sounding information.

Key takeaways

If you are buy-side or sell-side who may disclose or receive market sounding information during the course of a market sounding, you should get yourselves prepared before 2 May 2025 by formulating the governance structure and the policies and procedures. There is no "one-size-fits-all" and each firm and its senior management must decide and determine the appropriate controls to achieve the compliance objective of the MS Guidelines.

For detailed guidance and compliance assistance, please contact us.