The FCA reminds market soundings recipients of their obligations under UK MAR best practices for trading during the market sounding period.
On 31 October 2023, the FCA published Market Watch 75 reminding firms of the importance of robust market soundings procedures. In particular, the publication sets out the FCA’s recent observations around the practices of market soundings recipients (MSRs) and their conduct in the period between being asked to consent to being sounded by disclosing market participants (DMPs), and the sounding itself taking place.
Market soundings can involve the communication of confidential and/or inside information under UK MAR and act as a safe harbour to an unlawful disclosure offence on the basis that a compliant market sounding is performed in the normal exercise of a DMP’s employment, profession, or duties. The market soundings process includes standardised arrangements and information requirements to ensure that no potentially sensitive information is unnecessarily disclosed.
As part of preparing for a market sounding, DMPs must determine if inside information will be communicated during the sounding, document this analysis, and use the relevant process and script for an inside information market sounding. DMPs must also obtain confirmation that an MSR is willing to be sounded and be made off side by being provided with inside information ahead of the sounding itself. During the sounding, DMPs are required to remind MSRs of their obligations under UK MAR where inside information has been shared.
MSRs are also subject to a complementary obligation to independently assess if they possess inside information from the market sounding which would prohibit them from trading. This is because the DMP can make its assessment but will not know the information to which the MSR has access and therefore whether the information communicated during the sounding could, whilst generally not inside information for other MSRs, crystallise into inside information for a specific MSR as a result of that MSR’s knowledge.
Given there is sometimes a gap in time between the DMP contacting MSRs and requesting their consent to being sounded, and the sounding itself taking place (during which the inside information is then communicated) the FCA has observed there being a risk that during that period, MSRs may be able to identify the issuer and/or instruments that will be the subject of the forthcoming substantive sounding and trade during that period. The FCA gives an example of when an issuer has previously held regular and similarly sized funding rounds executed by the same advisory firms, or where an MSR holds a very small number of investments in its portfolio, the MSR might be able to identify the issuer.
The FCA notes that it has seen trading by MSRs during this period and that, when asked, the MSRs’ explanations are not easily reconcilable with the circumstances of the trading. For example, an MSR selling a financial instrument immediately after a DMP has sought its consent to receive inside information, then buying the same quantity of the financial instrument back in the subsequent placing does not reconcile with “Rebalancing a portfolio”. Nor does this rationale reconcile easily with instructions to trade being phrased with urgency.
MSRs are therefore reminded of their obligations under UK MAR to determine if they possess inside information before trading. The FCA also reminds firms that in addition to the civil penalties under UK MAR, MSRs remain subject to the prohibitions on using inside information under Part V of the Criminal Justice Act 1993 (CJA). The FCA also notes that the UK MAR market soundings regime does not provide safe harbour against UK MAR or CJA insider dealing offences.
The FCA provides some of the safeguards DMPs and MSRs can implement to mitigate these risks:
- MSRs can put in place “gatekeeper” arrangements where specific teams or staff in compliance are the nominated first point of contact for DMPs.
- MSRs should ensure staff receiving market soundings are properly trained.
- DMPs should minimise the period between obtaining consent from MSRs to be sounded and conducting the sounding.
This is clearly an area of concern for the FCA, and market participants should evaluate their market sounding procedures to ensure that they have all appropriate safeguards in place.