FCA Publishes Warning on Market Soundings

On 31 October 2023, the U.K. Financial Conduct Authority (FCA) published Market Watch 75, a warning to the U.K. market on market soundings. Market soundings include any communication of information or interaction between issuers and investors, in order to gauge the interest of potential investors in a transaction before its announcement. The FCA has issued this guidance in response to its recent observations of Market Sounding Recipients (MSRs) trading in the “gap” between the initial contact from Disclosing Market Participants (DMPs) and the disclosure of inside information.

Market soundings are intended to be used as a form of safe harbour for parties in relation to unlawful disclosure offences under the UK Market Abuse Regulation (UK MAR). As market soundings often involve communication with potential investors of information that is confidential and/or inside information, there is an inherent risk of an unlawful disclosure offence under UK MAR. For this reason, the market sounding process has been established to include standardised arrangements and information requirements to ensure that confidential/inside information is not unnecessarily or unlawfully disclosed.

The FCA’s warning was published following observations from MSRs and the potential risks that the FCA has noticed as a result of this. In the market sounding process, DMPs will usually need to contact MSRs before providing any inside information, and this ultimately results in a “gap” between the time of initial contact and the disclosure of inside information. In order for inside information to be legitimately disclosed by DMPs, MSRs must consent to receive market soundings and DMPs must also inform MSRs that they are prohibited from using the information to trade or attempt to trade the relevant instruments. MSRs are also required to independently assess for themselves whether any information they receive is inside information which would prohibit them from trading. They cannot rely solely on the issuer’s own assessment.

The FCA has observed that in some circumstances it has been possible for MSRs to identify the relevant issuer and/or instruments that will be subject to the forthcoming market sounding following initial contact with DMPs. Whilst the DMPs have not specifically disclosed the identities of the financial instruments to the MSRs, the MSRs have been able to identify those details through using other information available to them. The FCA is concerned that in these instances, MSRs have an unfair advantage over other market participants and reminds market participants that dealing with the relevant financial instruments in these circumstances may amount to insider dealing. This is an offence under UK MAR and also a criminal offence under the Criminal Justice Act 1993 (CJA).

As such, the market sounding process carries inherent risks for all parties involved in relation to UK MAR offences as well criminal offences under the CJA. The FCA has helpfully provided some guidance in Market Watch 75 that DMPs and MSRs can implement to minimise the risk of insider dealing and unlawful disclosure of inside information:

• DMPs should take particular care when making soundings on financial instruments (such as shares of a quoted/listed company) that have few parties involved and where potential external information available or held by the MSRs could reasonably be used to identify the relevant financial instrument.
• When initially communicating with MSRs and seeking their consent to receive the market sounding and inside information, DMPs should be alert to the risk of unlawfully disclosing inside information. They should consider whether the information provided at this stage is essential for MSRs to decide if they wish to receive the information.
• DMPs may wish to tailor the information they plan to give, depending on the nature of the transaction, so that they do not inadvertently disclose inside information.
• If the MSR is a private individual whose awareness of possible breaches may be less than more sophisticated corporate clients, DMPs should consider using specific arrangements and scripts and tailoring the information provided to better safeguard the process.
• DMPs should make clear at the start of any market sounding that the communication is a market sounding. This gives the MSR the opportunity to decline, and reduces the risk of disclosing any inside information arising from the market sounding.
• DMPs and MSRs should consider minimising time intervals between the DMP’s initial communications and requests for consent, and the MSR’s consenting to such requests. Reducing this time period will help minimise the risks of insider dealing.
• MSRs should consider putting in place the ‘Gatekeeper’ arrangements (these are highlighted in Market Watch 51 and 58 published by the FCA). For example, these include appointing specific teams or staff in compliance as the first point of contact for DMPs.
• MSRs should also ensure that staff who receive and process market soundings are properly trained in relevant internal procedures and UK MAR prohibitions on unlawful use of inside information.

More recently, the FCA (and other U.K. regulators) have been keen to become more active in warning the market, market participants and using their regulatory powers, as and when required, in relation to UK MAR. Please see our article for some recent examples of this – U.K. Regulators Send a Message on Market Abuse Failings.

Armstrong Teasdale’s team is well versed in guiding and assisting clients through the market sounding process, UK MAR and other related regulatory issues that arise in the course of public company transactions. If you have any questions on the matters discussed within this article or if you need further guidance on the manner in which you should be disclosing information in compliance with UK MAR, please contact your regular AT lawyer or one of the authors from our U.K. Capital Markets team.

Disclaimer: This publication is provided by Armstrong Teasdale Limited for informational purposes only. The information contained in this publication should not be construed as legal advice. Any questions or further information regarding the matters discussed in this publication can be directed to Armstrong Teasdale’s U.K. Capital Markets team.