The Hong Kong Securities and Futures Commission (SFC) has released new guidelines for market sounding (Guidelines), which will come into effect on 02 May 2025. Firms carrying out market soundings in Hong Kong need to be aware of the actions and regulatory takeaways contained within these guidelines.
Financial firms must understand and comply with the principles and requirements set out in the Guidelines. While the Guidelines themselves do not establish direct liability, their breach could also influence the SFC’s assessment of “fit and proper” status of registered or licensed individuals and other regulatory judgments. Persons failing to comply with the Guidelines may also find their instances of non-compliance as admissible evidence in any proceedings under the Securities and Futures Ordinance (SFO).
The Importance and Scope of Market Soundings
“Market sounding” relates to the communication of information with potential investors before any public announcement of a transaction. The purpose of a market sounding is to gauge the interest of relevant parties in a possible transaction and help set out the related specifications and terms, such as potential timing, size, pricing, structure and trading method.
In general, market soundings are useful in both initial public offerings (IPOs) and secondary offers to help issuers understand what the market is likely to pay for a particular financial instrument. They may also be appropriate in merger and acquisition (M&A) instances where the bidding company needs to engage shareholders of the target company.
These practices help “sound out” potential investors and set the appropriate price for financial instruments on offer.
Within the context of the Guidelines, the SFC places emphasis on gauging investor interest and determining pre-announcement transaction specifics. Key elements of market soundings in the scope of the Guidelines include:
- The communication of market sounding information with potential investors.
- Relevant communications prior to announcements or transactions occurring.
- Gauging the interest of potential investors and determining the terms, timing, size, pricing, and structure of trading the proposed financial instruments.
Market soundings involve sensitive information and must be handled with care and diligence. Firms need to remain highly aware that any person involved in market soundings remains subject to the relevant laws and regulations concerning insider dealing.
Core Principles of the Market Sounding Guidelines
The SFC has comprised the Guidelines of four core principles:
Handling of information: stating the responsibilities of the market sounding intermediary in seeing that market sounding information is handled diligently to prevent disclosure, misuse and leakage of that information. These duties include ensuring that:
- Staff meet appropriate standards of conduct.
- Staff adhere to strong principles and processes around the sharing of market sounding information.
- There are physical and functional safeguards in place by separating duties and information access rights appropriately, for example, information being kept on a “need-to-know” basis.
Governance: to maintain effective supervision over market sounding activities, intermediaries need strong governance and oversight arrangements. Sound policies and procedures must be developed and enforced by the intermediary, including:
- Senior management needs to assume responsibility for the oversight of market soundings, related risks, and outcomes.
- Governance arrangements are established according to the size and complexity of the intermediary, with clear definitions around individuals or designated committees that will monitor market soundings to support senior management’s oversight.
- Processes and procedures that alert senior management and designated persons or committees to matters and follow-up actions related to market soundings.
Policies and procedures: specifying how market soundings should be conducted must be documented and reviewed periodically to see that:
- The allocation of roles and responsibilities of persons involved in market soundings supports a “three lines of defence” approach.
- Personal dealing policies and procedures prevent any misuse of market sounding information for unethical gains.
- Defined sanctions and disciplinary actions are imposed in cases of non-compliance with requirements.
Review and monitoring controls: defining the responsibility of intermediaries to employ controls and surveillance to detect unethical behaviours, misconduct, and misuse or leakage of information, and non-compliance. Intermediaries must undertake periodic reviews that include:
- The personal trading activities and trade surveillance controls of staff and the firm.
- Voice and electronic communications (eComms).
- Unauthorised access to market sounding information.
Among the core principles of the SFC’s Market Sounding Guidelines, compliance teams must ensure sensitive information is recorded and kept. The requirements for digital record-keeping mean that firms must think carefully about the tools and processes used to collect and retain this information. MyComplianceOffice (MCO) APAC Director Kelly-Ann McHugh, elaborates, “ Market soundings involve a lot of sensitive information that is passing between two different parties and manually tracking inside information, market soundings, meetings with external parties can be quite burdensome and is really critical to books and records or record-keeping requirements around the world. The SFC has put out new regulation in this space and a really great way of managing your digitalisation of these records is using a compliance management solution, such as MyComplianceOffice (MCO).
“MCO is a compliance management solution where you can record any type of inside information that you obtain from a third party, when you got access to it, who got access to it, when they got approval to it. So by digitalising that process of obtaining that information, you can generate your insider lists and provide that information to the regulator very easily, quickly, and efficiently.
“Another aspect of market soundings is the overall record keeping of external expert network meetings that might occur. And so by using a centralised system to record any of those engagements, you're not navigating to one, two, three different external expert network solutions. Rather, coming to one centralised system to find any market sounding expert network meetings that you might have had.”
eCommunications Are in the Spotlight
Of particular note are the requirements set out around communication channels, controls, and surveillance, including eComms surveillance.
The Guidelines state that intermediaries must use a standardised script, authorised channels and recording of related communications. Records related to market soundings, including audio, video, and text records, should be kept for at least two years, and be easily accessible.
The SFC displays a clear shift towards standardised eComms processes, discouraging ad-hoc formats unless more robust digital methods are inaccessible. The regulator states that “the use of other formats (eg, written minutes) to record market soundings conducted should only be allowed if a Disclosing Person’s telephone recording system or other recorded communication channels cannot be accessed.”
Importantly, any disclosing person is urged to only conduct market sounding communications over channels authorised by senior management, legal, or compliance functions. In recent years, work-from-home arrangements, bring-your-own-device (BYOD) policies, and the sheer proliferation of available eComms channels—from Signal and WhatsApp to social messaging systems like LinkedIn and Facebook Messenger—have increased the complexity of maintaining effective controls and surveillance.
MyComplianceOffice (MCO) has published an in-depth article detailing how firms can enhance their controls and stay ahead of regulatory change in eComms surveillance. Our on-demand webinar further explores the need for robust eComms policies and processes as global regulators hone in on off-channel comms enforcement actions.
Firms have many aspects of eComms to consider, such as developing robust internal policies and processes, ongoing training and attestations, balancing data privacy with surveillance obligations, and more. However, Regulatory Technology (RegTech) can take the heavy lifting out of effective surveillance and record-keeping.
Staying on Top of Evolving Regulation
Compliance teams, of all sizes, can encounter challenges in keeping up with regulatory change. Consultation papers, feedback submissions, outcomes and final guidelines, and changes to existing regulations can create a maze of information to navigate through. On top of this, compliance professionals must also anticipate the future direction of regulators, often across multiple jurisdictions.
Complexity creeps in as firms must ensure policies and procedures are aligned with evolving regulatory obligations and potentially keep pace with changes in multiple regions. McHugh explains, “Take the upcoming SFC Market Sounding Guidelines as an example. While these new guidelines are set to take effect this May [2025], firms may already have market sounding policies in place, potentially influenced by similar regulations from other jurisdictions.”
However, technology is solving these common challenges. McHugh says, “With a solution like MCO’s KYO Suite, the release of the SFC’s final guidelines would trigger an alert, mapping the new requirements directly to your internal compliance obligations. From there, the system could initiate a policy review process, ensuring your firm’s procedures align with the updated regulatory expectations. This eliminates the manual burden of tracking changes and provides the assurance that compliance risks are actively managed.”
Regulatory change management software, such as that offered by MCO, can be a critical piece in every Compliance Officer’s toolkit for understanding regulatory insights, current obligations, and the direction of future regulatory change.
McHugh adds, “When the SFC released their final guidelines it could then be mapped to your internal obligation for managing market sounding and inside information, flag any compliance risks, and kick off a policy review process to ensure your existing policy and procedure meets the new obligations that have come from the SFC.”
The Value of a RegTech Solution
Technology plays a truly transformative role regarding modern eComms surveillance—particularly in the context of maintaining secure, auditable communication records to satisfy regulator’s expectations, such as those set out in the SFC’s Guidelines.
RegTech solutions, such as MCO, create a central repository for all market soundings and other inside information received to help firms comply with the SFC’s Guidelines—and also ensure policies and processes uphold regulatory obligations across multiple jurisdictions.
Streamlined workflows also reduce ad-hoc emails between investment teams and the control room, with auditable workflows to track when sensitive information was received, by whom, on what company, and when it was cleansed.
McHugh explains, “ The MyComplianceOffice Know Your Transactions Suite, in particular our Material Non Public Information Manager solution, can assist firms with: 1. Creating a central repository for all market soundings and other inside information you may have received. 2. It can streamline the workflow and reduce ad hoc emails between investment teams and the control room. 3. An ability to create an auditable workflow of when information was received or given by whom, what company was it about and when was it cleansed or made public.
“In addition, it can also assist with detecting any potential conflict before receiving or giving that information. And lastly, with any reports that you might require for management of inside information lists, including wall crossing reports and insider dealing reports and inside information for the MAR regulation in Europe.”
The MCO RegTech platform offers a unique combination of employee surveillance, transaction monitoring, third-party oversight, conflicts of interest identification, and regulatory change monitoring and management. Equipped with an intuitive, user-friendly compliance platform, firms can operate with the confidence that robust controls and intelligent alerts are enabling them to remain compliant with the latest regulations and safeguard their firms from financial, operational, and reputational harm.
Some of the highlights of the MCO platform’s capabilities include:
- Insider list and MNPI management.
- A regulatory change manager tool with horizon scanning capabilities to help compliance teams stay informed and up-to-date with relevant laws and regulations.
- A robust eComms surveillance and archiving system.
- Fit and proper accountability with continuing education, registrations and licensing, and attestations management.
- Personal trading compliance management.
The Next Steps Forward
Firms located (or with operations) in Hong Kong should review their controls and procedures and make the necessary changes to remain compliant with the new Guidelines set out by the SFC. See the full Guidelines here.
Should you wish to explore how RegTech can do more of the heavy lifting across eComms, fit and proper, personal trading, and more, request your no-obligation demonstration tailored to your firm’s needs.
