The FCA’s latest Market Watch reminds firms of the risks associated with market soundings and the arrangements they should have in place to mitigate the possibility of market abuse. The latest issue includes the regulator’s observations around insider dealing and unlawful disclosure, and is a useful reminder of the need for robust controls.

Market Watch 75, published at the end of October shares the regulator’s observations since Market Watch 51 and 58 – published in 2016 and 2018 – which provided insight into the FCA’s findings on market soundings and expectations on the controls firms should put in place.

The FCA has now returned to the topic to provide more recent observations and remind firms of the importance of controls in minimising insider dealing and unlawful disclosure.

Market soundings

Market soundings are a regulatory framework for investment firms and individuals when it comes to disclosing inside information. They act as communications between issuers and investors, allowing for the disclosure of inside information as part of their professional duties. Market soundings are a key tool for issuers to help them gauge investor interest, opinions and price discovery.

Market soundings provide a safe harbour against allegations of unlawful disclosures – but only insofar as the regime is correctly followed. As a result, it’s crucial that firms who provide market soundings: Disclosing Market Participants – or DMPs – and firms receiving market soundings: Market Sounding Recipients – or MSRs – have strict controls to manage the risks involved.

In addition, it’s worth remembering that market sounding controls only provide protections to DMPs against unlawful disclosure. Neither DMPs nor MSRs are exempt from the prohibitions on trading on inside information from market soundings.

Expectations of DMPs

DMPs, as the party releasing the information, are the starting point and cornerstone of effective market soundings controls. DMPs are expected to:

Expectations of MSRs

MSRs are not exempt from responsibilities and are expected to:

Recent observations

Despite existing guidance, the FCA is still identifying weaknesses in market practices. This includes instances of MSRs trading in a relevant financial instrument during the period when a DMP initiated communication (ie. sought consent), but before the sounding was communicated. The FCA found that whilst DMPs may not have disclosed the identities of the financial instrument and details of proposed transaction during initial communications, MSRs were still able to ascertain the identity of the financial instrument using other available information. This is more likely to happen on smaller, less liquid markets, with fewer market participants. As a result, DMPs should seek to reduce the lag between the time they request consent, and the MSRs consenting, to help minimise delays and the risk of insider dealing. Equally, DMPs should consider instances where MSRs have less awareness of the rules and use specific arrangements and scripts as required, with reminders of the regime and existing prohibitions.

Depending on the approach, a declined wall-crossing could still convey inside information – as demonstrated in the FCA’s 2012 final notice against David Einhorn which still holds true. In the notice, the FSA found Mr Einhorn guilty of insider dealing as he traded Punch Tavern shares after declining to be wall crossed. It was found that enough information had been shared on an “open”, non-wall-crossed basis, to constitute inside information.

Ultimately, the FCA identified that a lack of strict controls for firm’s market soundings arrangements, particularly when trading at the time of a request for consent, may expose firms to increased insider dealing risk.

What can you do?

It’s important to take market soundings arrangements seriously. In addition to the DMP and MSR requirements above, it’s worth considering the following:

How can we help

We regularly help clients assess their market abuse and market soundings arrangements, analyse the risks they face, and support with the design of effective systems and controls.

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