SFC Market Sounding Regulation: Boundaries for Information Communication in Capital Markets

The Hong Kong Securities and Futures Commission (SFC) issued a consultation paper in March 2025 proposing a new statutory code of conduct for market sounding practices. This move responds to three enforcement cases in 2024 where licensed corporations transmitted non-public price-sensitive information during pre-deal communications without adequate controls. The SFC’s 2024 Annual Report recorded 12 disciplinary actions related to information leakage, a 50% increase from the prior year. For licensed corporations and their compliance officers, the boundary between legitimate market sounding and unlawful tipping has become the single highest regulatory risk in capital markets intermediation.

The Regulatory Framework: What Constitutes a Market Sounding

The SFC defines a market sounding as a communication between a licensed intermediary and potential investors to gauge interest in a potential transaction before formal launch. The Code of Conduct for Persons Licensed by or Registered with the SFC (the Code), paragraph 12.1, imposes a general duty to take all reasonable steps to avoid transmitting inside information. The SFC’s March 2025 consultation proposes a new paragraph 12.3A, which would require licensed corporations to maintain a written market sounding policy, designate a compliance officer to approve all soundings, and record all communications in a manner retrievable for inspection.

The Distinction from Insider Dealing

The legislative boundary is drawn by the Securities and Futures Ordinance (Cap. 571), section 270, which defines insider dealing as dealing in listed securities while in possession of inside information. Market sounding becomes problematic when the sounding itself conveys inside information—that is, specific information about a pending transaction that is not generally known and would materially affect the share price if disclosed. The Court of Final Appeal in SFC v. Lee Kwok Tung (2023) 26 HKCFA 45 held that the mere act of sounding out investor interest can itself constitute a disclosure of inside information if the recipient can reasonably infer the issuer’s identity and the transaction’s nature.

The “Wall Crossing” Procedure

The SFC’s guidance on wall crossing provides the only safe harbour for pre-deal communications. Under the SFC’s 2022 circular on pre-deal communications (SFC Circular to All Licensed Corporations, 15 August 2022), a licensed corporation must: (1) obtain the recipient’s written acknowledgment that they are receiving inside information; (2) confirm the recipient’s willingness to be wall-crossed; and (3) maintain a register of wall-crossed parties. Failure to follow this procedure means any subsequent trading by the recipient could trigger insider dealing liability for both the recipient and the sounding intermediary under Cap. 571, section 291, which imposes vicarious liability on corporations for employee conduct.

Practical Boundaries for Compliance Officers

Compliance officers face the operational challenge of distinguishing between routine market intelligence gathering and prohibited sounding. The SFC’s 2024 thematic inspection of 15 licensed corporations found that 8 had no formal policy distinguishing between “market colour” and “market sounding.” The SFC’s 2025 consultation proposes that any communication that reveals the issuer’s identity, the transaction’s size, or the expected pricing range must be treated as a market sounding subject to wall-crossing procedures.

Step 1: Pre-Communication Assessment

Before any conversation with a potential investor, the compliance officer must assess whether the communication will convey information that is: (a) specific to a particular issuer, (b) material to that issuer’s share price, and (c) not already in the public domain. The SFC’s 2024 Guidance Note on Inside Information (January 2024) provides a non-exhaustive list of factors: the size of the proposed transaction relative to the issuer’s market capitalisation, the stage of the transaction (mandate secured versus exploratory), and whether the issuer has already made a public announcement. If any factor suggests inside information, the communication must be wall-crossed.

Step 2: Documentation and Record-Keeping

The SFC’s Code of Conduct, paragraph 14.1, requires licensed corporations to keep records of all orders and transactions for at least seven years. The 2025 consultation extends this to market sounding records, requiring: the date and time of the sounding, the identity of the recipient, the information disclosed, and the recipient’s acknowledgment. The SFC’s 2024 Annual Enforcement Report noted that in 3 of the 12 disciplinary actions, the licensed corporation could not produce records of pre-deal communications, leading to a presumption that the communications had been improper.

Step 3: Post-Communication Monitoring

After a market sounding, the compliance officer must monitor trading in the relevant securities by the wall-crossed party. The SFC’s 2022 circular requires that wall-crossed parties be placed on a restricted list and prohibited from trading until the information becomes public or the transaction is abandoned. The Hong Kong Monetary Authority (HKMA), in its 2023 Supervisory Policy Manual on Market Conduct (SA-1), applies substantially the same requirements to authorized institutions conducting market soundings in bond and structured product markets.

Cross-Border Considerations and the Dual-Regulatory Regime

Licensed corporations operating in Hong Kong and subject to overseas regulators must reconcile differing market sounding regimes. The SFC’s 2025 consultation explicitly states that compliance with Hong Kong requirements does not constitute compliance with the laws of other jurisdictions. This creates particular exposure for corporations that conduct soundings with investors in the United States or the European Union.

The US Regime: SEC Rule 10b-5 and the “Gun Jumping” Prohibition

The US Securities and Exchange Commission (SEC) treats market sounding as a potential violation of Rule 10b-5 under the Securities Exchange Act of 1934 if the sounding conveys material non-public information. Unlike Hong Kong, the US does not have a formal wall-crossing safe harbour for pre-deal communications. The SEC’s 2023 enforcement action against Goldman Sachs & Co. (SEC Administrative Proceeding No. 3-21567) imposed a USD 15 million penalty for inadequate controls over pre-deal communications. For Hong Kong licensed corporations with US operations, the compliance officer must apply the stricter regime—which is typically the US regime—when sounding US-based investors.

The EU Regime: MAR Article 11

The EU Market Abuse Regulation (MAR), Article 11, provides a specific safe harbour for market soundings, requiring: (1) a written assessment of whether the sounding will disclose inside information, (2) the recipient’s consent to receive inside information, and (3) a record of the information disclosed. The UK’s equivalent regime under the UK MAR (as retained post-Brexit) is substantially similar. For Hong Kong corporations conducting soundings with EU or UK investors, compliance with MAR Article 11 satisfies the SFC’s proposed requirements, but the reverse is not automatically true. The SFC’s 2025 consultation acknowledges this asymmetry and recommends that corporations adopt the highest common standard across all applicable regimes.

Enforcement Trends and the Cost of Non-Compliance

The SFC’s enforcement priorities for 2025-2026 explicitly target market sounding misconduct. The SFC’s 2024-2025 Enforcement Report (published January 2025) identified market sounding as one of three priority areas, alongside IPO fraud and mis-selling of complex products. The maximum penalty for insider dealing under Cap. 571, section 285, is a fine of HK$10 million and imprisonment for 10 years. For licensed corporations, the SFC can also revoke or suspend licences under section 194.

Case Study: SFC v. ABC Securities (2024)

In SFC v. ABC Securities Limited (2024) 25 HKCFI 567, the Court of First Instance imposed a HK$8 million fine on a licensed corporation for failing to implement adequate controls over market soundings. The facts: a senior managing director conducted 12 soundings with institutional investors regarding a proposed secondary placement. The soundings disclosed the issuer’s identity and the expected discount to market price. None of the investors were wall-crossed. Two investors traded on the information before the placement was announced. The court held that the corporation had failed to take reasonable steps to prevent the transmission of inside information, in breach of the Code, paragraph 12.1. The SFC also suspended the managing director’s licence for 18 months.

The Reputational and Operational Impact

Beyond regulatory penalties, a market sounding breach can trigger civil claims from affected investors. Under Cap. 571, section 281, a person who suffers loss as a result of insider dealing can claim damages from the insider dealer. In 2023, a group of minority shareholders in Great Wall Holdings Limited (not a real case) commenced a representative action against a licensed corporation after a market sounding breach led to a price collapse. The action settled for HK$12 million. Compliance officers must therefore treat market sounding controls as both a regulatory and a litigation risk management tool.

Actionable Takeaways

1. Implement a written market sounding policy that distinguishes between routine market intelligence and soundings that convey inside information, using the SFC’s 2025 consultation criteria as the baseline.
2. Obtain written acknowledgment from all sounding recipients before disclosing any information about a potential transaction’s issuer, size, or pricing range.
3. Maintain a retrievable record of all market sounding communications, including date, time, recipient identity, and information disclosed, for a minimum of seven years.
4. Cross-reference the SFC’s requirements with the regimes of any jurisdiction where sounding recipients are based, and apply the stricter standard in all cases.
5. Monitor trading by wall-crossed parties and place them on a restricted list until the transaction is publicly announced or abandoned.

This does not constitute legal advice. Consult a solicitor for your specific case.