Article 11 of Market Abuse Regulation (MAR) regulates market soundings and related procedures. More detailed provisions on the appropriate procedures are laid down in the Commission Delegated Regulation (EU) 2016/960, the Commission Implementing Regulation (EU) 2016/959 and in guidelines issued by the European Securities and Markets Authority (ESMA) for persons receiving market soundings.
What is market sounding?
Market sounding is defined in Article 11.1 of MAR as follows: “a market sounding comprises the communication of information, prior to the announcement of a transaction, in order to gauge the interest of potential investors in a possible transaction and the conditions relating to it, such as its potential size or pricing, to one or more potential investors.”
To whom and what does this regulation apply?
According to the scope of application of Article 11 of MAR, the provisions of the Regulation regarding market soundings apply to
- an issuer,
- a secondary offeror of a financial instrument, in such quantity or value that the transaction is distinct from ordinary trading and involves a selling method based on the prior assessment of potential interest from potential investors (in practice, normally providers of investment services),
- third parties acting on behalf or on the account of the above mentioned.
Market sounding is typically done in connection with private placement arrangements and block trades.
In accordance with Article 11 (1a) of MAR, communication of information to qualified investors for the purposes of negotiating the contractual terms and conditions of an issuance of bonds shall not constitute market sounding. The disclosure of inside information to qualified investors in such contexts shall be deemed to be made in the normal exercise of a person’s employment, profession or duties, provided that there is an appropriate non-disclosure agreement in place.
The regulatory standards relating to market sounding also apply with certain conditions to a situation in which a party planning to make a public takeover or merger discloses inside information to the parties entitled to the said securities, such as, for example, major shareholders. A condition is that the parties need the information to form their opinion on the offering of securities, and the opinion on the arrangement of those receiving the market sounding can be reasonably considered necessary for making a decision on a takeover bid or merger.
Market soundings and prohibition against disclosure of inside information
Compliance with procedures in paragraphs 3 and 5 of Article 11 of MAR provides the disclosing market participant with a “safe harbour” with regard to suspicions of infringement of the prohibition against disclosure of inside information under Article 10 of MAR. Disclosure of information made in the course of a market sounding is deemed to be made in the normal exercise of a person’s employment, profession or duties where the disclosing market participant complies with the procedures specified in the above Articles.
Procedures related to market soundings
Disclosing market participant
A disclosing market participant must have in place procedures relating to market sounding as well as the recording of calls relating to market sounding. Market sounding may take place, for example, orally in connection with a meeting, via an audio or video call, in writing or by means of electronic communications. The procedures must provide instructions that market sounding conducted by telephone is done only using recorded telephone lines, if a recording procedure is available. In addition, procedures must specify the standard set of information that is always given to the recipients of information before actual sounding begins.
In addition to internal instructions, adequate training of staff participating in market soundings plays an important role in the adoption of the procedures.
Information disclosed and consents obtained prior to conducting a market sounding
According to Article 11.3 of MAR, prior to conducting a market sounding, a disclosing market participant shall specifically consider whether the market sounding will involve the disclosure of inside information and make a written record of its conclusion and the reasons therefor.
Prior to commencing an actual market sounding, the disclosing market participant shall inform the person receiving the market sounding of the following:
- that market sounding is involved
- notification of the recording of the telephone, audio or video call and that this requires the consent of the person receiving the market sounding
- clarification that the person receiving the market sounding is entitled to receive the information
- notification of the fact that, according to the assessment of the disclosing market participant, the information disclosed contains inside information and a reference to Article 11.7 of MAR, according to which the person receiving the market sounding is under an obligation to assess for itself whether it is in possession of inside information
- estimation, if possible, of when the information ceases to be inside information
- statement regarding the obligations related to the reception of inside information (prohibitions of the use and disclosure of inside information/emphasising the confidentiality of the information).
In addition, the express consent to receive the information shall be obtained from the person receiving the market sounding.
If, in the assessment of the disclosing market participant, the information to be given in connection with the market sounding is not inside information, the above-mentioned information should be disclosed to the person receiving the market sounding where applicable.
Record keeping of information related to market sounding
If the contact preceding market sounding and the market sounding itself are not recorded, the participant conducting market sounding shall make a written note of all information and consents given before and during the market sounding. The written minutes or notes shall be approved and signed by both the parties within five (5) business days.
Article 4 of the Commission Implementing Regulation defines the information that shall be recorded on market sounding. This information includes full names of the disclosing market participant and the person receiving the communication and the contact details used for the communication, date and time of the market sounding, and information to identify the transaction that was subject to the market sounding.
In addition, the participant conducting market sounding shall keep a list of parties who have not given their consent to market sounding
Communication that the information has ceased to be inside information
The disclosing market participant shall ensure that the person receiving a market sounding is notified when the information disclosed ceases to be inside information. Article 4 of the Commission Implementing Regulation defines the specific information requirement for the communication that the information disclosed has ceased to be inside information.
Reliable storage of information
The disclosing market participant shall ensure that the information related to a market sounding is kept on a durable medium that enables the accessibility and readability of the information. The records of the information concerning a market sounding must be retained for at least five (5) years. The Commission Implementing Regulation contains more precise provisions on storing the information.
Persons receiving market soundings
Procedures concerning persons receiving market soundings
According to Article 11.7 of MAR, the person receiving the market sounding must assess for itself whether it is in possession of inside information or when it ceases to be in possession of inside information. Such an assessment must also take account of information the person receiving the market sounding has received via or from other sources. If the assessments of the disclosing market participant and the person receiving the market sounding differ as regards the nature of the information, the recipient must submit its own assessment to the disclosing market participant. However, no such assessment will be submitted if the assessment of the recipient is based on information other than that received in connection with the market sounding.
Guidelines by the European Securities Markets Authority (ESMA) provide more detailed procedures for persons receiving market soundings. The person receiving the market sounding should have internal procedures to ensure the reliable handling of inside information/confidential information received in connection with the market sounding.
Reliable handling also includes instructing and training staff. According to the ESMA Guidelines, the person receiving the market sounding should also maintain a list of persons who have received inside information or confidential information relating to market sounding.
Submission of information to the FIN-FSA upon request
The disclosing market participant must, upon request, submit to the FIN-FSA in writing the conclusions recorded, the reasons therefor and the recorded information.
The information must be submitted to the FIN-FSA (firstname.surname(at)fiva.fi) using encrypted email.
COMMISSION DELEGATED REGULATION (EU) 2016/960 (pdf)
COMMISSION IMPLEMENTING REGULATION (EU) 2016/959 (pdf)
MAR Guidelines Persons receiving market soundings