On 17 May 2016, the European Commission adopted a delegated regulation on market sounding, which supplements and commences with the new Market Abuse Regulation (MAR) on 3 July 2016. The delegated regulation will introduce systems and procedures for disclosing market participants (DMPs) to follow when conducting market soundings, thereby regulating the practice for the first time.

Who are DMPs?

A DMP may be any of the following:

1. An issuer
2. A secondary offeror of a financial instrument
3. An emission allowance market participant, which is any person who enters into transactions, including the placing of orders to trade, in emission allowances, auctioned products based thereon, or derivatives thereof
4. A third party acting on behalf or on the account of a person referred to in (1), (2) or (3) above

What is market sounding?

Market sounding is the communication of information, prior to the announcement of a transaction, to gauge the interest of potential investors in a possible transaction and the conditions relating to it, such as its potential size or pricing. Market soundings are distinct from ordinary trading and may involve an initial or secondary offer of relevant securities. Examples of market soundings include: where an issuer intends to announce a debt issuance or additional equity offering and key investors are contacted by a sell-side firm and given the full terms of the deal to obtain a financial commitment to participate in the transaction; or where the sell-side is seeking to sell a large amount of securities on behalf of an investor and seeks to gauge potential interest in those securities from other potential investors.

Conducting market soundings may require disclosure to potential investors of inside information. However, where such disclosure is made in the course of a market sounding, and provided the requirements as set out in MAR are complied with, these disclosures will be considered to have been made in the normal course of a person’s employment, profession or duties and the information will, under MAR, be deemed as having been disclosed legitimately.

What are the requirements?

A DMP will be considered to be acting within the normal course of his employment, profession or duties where the following requirements are met. Before making a disclosure a DMP must:

1. Specifically assess whether the market sounding will involve the disclosure of inside information. The DMP must then make a written record of its conclusion and the reasons for reaching it and it must provide this written record to the Central Bank of Ireland (or other relevant competent authority) upon request.
2. Obtain the consent of the person receiving the market sounding to receive inside information.
3. Inform the person receiving the market sounding that he/she is prohibited from using that information, or attempting to use that information to:
   1. acquire or dispose of, for his/her own account or for the account of a third party, directly or indirectly, financial instruments relating to that information; and
   2. cancel or amend an order which has already been placed concerning a financial instrument to which the information relates.
4. Inform the person receiving the market sounding that by agreeing to receive the information he/she is obliged to keep the information confidential.

A DMP must make and maintain records containing (i) all information given to the person receiving the market sounding and (ii) the identity of each person to whom the information has been disclosed. These records must be maintained for at least five years and must be made available to the Central Bank of Ireland (or other relevant competent authority) upon request.

It should be noted that the market sounding recipient should make their own assessment of whether the information disclosed amounts to inside information that would prohibit dealing on the basis of it, or further disclosing it. MAR also requires that the market sounding recipient be informed as soon as the information received no longer constitutes inside information.

Practical tips

The new requirements under MAR are based on what is currently normal practice in advance of certain transactions. However, an examination of your internal policies and procedures should be carried out to determine whether they need to be updated to reflect the precise requirements of MAR, particularly in relation to record-keeping. Training on the new requirements and their impact should be given to staff members who may carry out market soundings.

Contributed by Niall Keane

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