Mastering Market Soundings and Wall-Crossings in Equity Placings

Robust Controls and Best Practices for Market Soundings and Wall-Crossings.

Introduction

Equity placings on the London Stock Exchange often require gauging investor interest in advance through market soundings – confidential discussions with potential investors before a deal is announced fca.org.uk. These pre-marketing activities (sometimes called “wall-crossings”) involve selectively disclosing inside information to certain investors to test appetite or set pricing for a forthcoming share issue cliffordchance.com. By “wall-crossing” an investor, the bank or broker makes them an insider by giving them confidential, price-sensitive information cliffordchance.com. While this early engagement is valuable for price discovery and deal success, it creates significant market abuse risk if not handled properly fca.org.uk.

The UK’s regulatory regime – chiefly the UK Market Abuse Regulation (UK MAR), Financial Conduct Authority (FCA) guidance, and London Stock Exchange expectations – sets strict requirements to prevent insider dealing and improper disclosure. Companies and their advisers must have tight controls on handling inside information and follow strict protocols when disclosing information ahead of a public announcement cliffordchance.com. This blog outlines the relevant regulations, team responsibilities, and practical controls to ensure compliance in market soundings and wall-crossings, helping maintain market integrity and avoid breaches.

Regulatory Framework: UK MAR, FCA Guidance, and LSE Requirements

UK MAR: The Market Abuse Regulation is the cornerstone of the UK’s market conduct rules, prohibiting insider dealing, unlawful disclosure of inside information, and market manipulation fca.org.uk. Inside information is broadly defined as non-public, precise information that would significantly impact price if made public fca.org.uk. Under MAR, disclosing inside information other than in the normal course of one’s employment or duties is unlawful cliffordchance.com – in other words, “selective disclosure” is banned unless it falls within a safe harbour.

Market Soundings Safe Harbour: MAR Article 11 provides a safe harbour for market soundings (the formal term for these pre-deal investor discussions). It allows disclosure of inside information when done in the normal exercise of one’s employment – i.e. when following the prescribed procedures for a market sounding fca.org.uk. To benefit from this safe harbour, the disclosing market participant (DMP – usually the issuing company or its advisors) must adhere to strict steps, including:

• Assess and document inside information: Determine if the transaction details constitute inside information and record that assessment fca.org.uk cosegic.com.

• Standardized scripts and procedures: Use approved scripts to communicate information consistently and fairly to all market sounding recipients (MSRs) fca.org.uk cosegic.com. This ensures no unnecessary or preferential information is disclosed.

• Obtain consent and NDA: Obtain the investor’s prior consent to receive inside information (often via a wall-crossing agreement or recorded consent) and an agreement to keep it confidential fca.org.uk acuitykp.com. Investors typically acknowledge via a “no trade” agreement that they will not deal on the information.

• Inform of insider obligations: Clearly warn recipients that the information is inside information and they are prohibited from using it to trade or tip others fca.org.uk cosegic.com. This reminder helps reinforce their legal duties under MAR and the Criminal Justice Act 1993 (insider dealing laws).

• Careful record-keeping: Make and maintain records of all communications and information disclosed during the sounding fca.org.uk cosegic.com. Records (call recordings, emails, meeting notes) should capture who was wall-crossed, when, and what was said. Good record-keeping is key to evidencing compliance and earning the safe harbour’s protection fca.org.uk.

Correspondingly, investors receiving a sounding (MSRs) have responsibilities under MAR and FCA guidance fca.org.uk cosegic.com. They must independently assess whether the information received (plus any other knowledge they have) makes them insiders, and refrain from trading if so fca.org.uk. MSRs should also keep their own records of soundings and decisions, and restrict internal knowledge on a need-to-know basis (e.g. using compliance “gatekeepers”) fca.org.uk cosegic.com. In short, being wall-crossed puts the investor under strict confidentiality and no-trade obligations just like the insider firm.

FCA Guidance: The FCA actively monitors compliance with the market sounding regime and has published guidance highlighting best practices. In its Market Watch newsletters, the FCA emphasizes that robust sounding procedures are vital to protect market integrity by controlling inside information and preventing abuse fca.org.uk. Notably, the FCA has warned of instances where recipients misused sounding information, for example by guessing the issuer’s identity and trading ahead of an official announcement fca.org.uk cosegic.com. The FCA reminds firms that the market sounding safe harbour protects only the discloser from unlawful disclosure accusations – it does not protect an investor who insider-deals using that information fca.org.uk. Both civil and criminal penalties can apply to insider dealing or improper disclosure.

The FCA’s guidance (e.g. Market Watch 58 and 75) and ESMA guidelines recommend measures like using compliance “gatekeepers” at investment firms, training staff on their obligations, keeping wall-crossing conversations high-level (“no names”) until consent is obtained, and minimizing the delay between initial contact and full disclosure fca.org.uk cosegic.com. The FCA has made it clear it will intervene if it suspects behaviour that undermines market confidence cosegic.com. Compliance teams should note that the FCA can request detailed records of communications, trading data, and sounding scripts to investigate potential abuse cosegic.com.

LSE and Listing Rules: The London Stock Exchange expects listed companies and member firms to uphold these market abuse regulations. UK MAR’s disclosure requirements (for inside information and insider lists) apply to issuers on the LSE’s markets, and the FCA (as competent authority) oversees and enforces these obligations docs.londonstockexchange.com. In practice, this means a company planning an equity placing must delay public disclosure of the deal only in accordance with MAR (ensuring confidentiality), and must notify the market promptly via a Regulatory Information Service (RNS) once the transaction is ready to announce or if a leak occurs. LSE rules reinforce that issuers should release inside information to the market as soon as possible if confidentiality breaks fca.org.uk. If rumors or unusual price movements suggest a leak, the company (in consultation with its advisors and potentially the FCA) should consider immediate announcement or a trading halt to maintain orderly markets.

(Note: Industry bodies like UK Finance and AFME have proposed simplifying certain MAR requirements post-Brexit to ease burdens (e.g. “amelioration of market sounding rules” was suggested) ukfinance.org.uk. However, until any rule changes occur, firms must fully comply with the existing UK MAR regime.)

Roles and Responsibilities of Key Teams

Ensuring compliance in wall-crossings is a cross-functional effort. Different teams in a bank or broker have distinct responsibilities to manage inside information and mitigate risks:

• Equity Capital Markets (ECM) / Deal Team: The ECM bankers planning the placing must coordinate the overall process and ensure regulatory compliance from the start. Their duties include identifying if the transaction information is inside information, and if so, justifying the wall-crossing as necessary (in the “normal exercise of duties”) and getting internal approvals (often via Compliance or a deal review committee). They prepare approved investor scripts or talking points in line with the MAR requirements fca.org.uk, making sure only essential facts are shared to gauge interest. The deal team also typically draws up the insider list of all people (internal and external) who will be wall-crossed, and works with the issuer to ensure the issuer’s own obligations (like maintaining insider lists and eventual public disclosure) are met. They should schedule “cleansing” announcements – ensuring that once the deal is launched or aborted, insiders are informed they can trade again because the information is public or no longer price-sensitive fca.org.uk. In short, ECM sets the protocol to bring investors over the wall safely, and must keep the process tightly controlled and documented.

• Syndicate Desk / Sales: The syndicate and sales professionals execute the market sounding by contacting investors and conveying the information under controlled conditions. They must follow the standardized wall-crossing script and procedure: first, without revealing confidential details, inquire if the investor is willing to receive potential inside information regarding a transaction fca.org.uk. If the investor agrees (and preferably confirms acceptance of an NDA or confidentiality terms), syndicate can then disclose the deal details. It’s crucial that salespeople do not divulge more than necessary in the pre-consent stage – for example, not naming the issuer or exact details until the investor formally consents, especially in situations with few possible issuers where even a small hint could give away inside information fca.org.uk cosegic.com. Syndicate must also explicitly remind the investor of their no-trade obligation and confirm they understand their insider status cosegic.com. All such conversations should be on recorded lines or documented immediately in call notes fca.org.uk. The syndicate desk should promptly relay to Compliance the details of who was wall-crossed and when, so that those names can be added to insider lists and the relevant securities added to restricted lists internally (preventing any proprietary or personal trading) acuitykp.com. Furthermore, syndicate/sales staff should be vigilant for any investor questions or behaviors that might indicate discomfort or potential misuse, and report any suspicious incidents (e.g. an investor declining the wall-cross and then trading the stock) to Compliance.

• Compliance and Control Room: The Compliance department (often via a dedicated Control Room) is the guardian of the wall-crossing process. Before any market sounding begins, Compliance should ensure there is a clear rationale and necessity for selectively disclosing inside information (documentation of why it’s in the normal course of duties) fca.org.uk. They review and approve the wall-crossing scripts and procedures to confirm they meet MAR standards. Compliance also manages the firm’s insider lists – recording which employees and outside parties are insiders on the deal fca.org.uk. As soon as a transaction becomes likely, Compliance will add the issuer’s securities to the firm’s restricted list, blocking any trading by the firm’s sales and trading teams outside the deal and stopping research analysts from publishing on the stock acuitykp.com. They enforce the Chinese wall separating the deal team (“private side”) from public-side staff, to prevent information leakage within the firm. Compliance should also provide training and guidance to all staff involved: for example, making sure syndicate and ECM teams understand the MAR soundings regime, how to recognize inside information, and their duties (no trading, need-to-know sharing only, etc.) acuitykp.com acuitykp.com.

During the sounding process, Compliance monitors for red flags. They may conduct surveillance on trading around the time of wall-crossings – for instance, checking if any wall-crossed investors or other connected parties traded the stock before the announcement, which could indicate insider dealing acuitykp.com. If suspicious activity is detected, Compliance must consider filing a STOR (Suspicious Transaction and Order Report) to the FCA. Compliance also oversees the cleansing process: ensuring that once the deal is publicly announced (or if it’s postponed/cancelled), a notification is sent to all insiders that they are “cleansed” – i.e. the information is now public or no longer inside information, lifting their trading restrictions fca.org.uk. Finally, Compliance should have a leak contingency plan: if news of the deal leaks or there’s unusual market movement, they are ready to advise immediate public disclosure and possibly liaise with the FCA and LSE to manage a trading halt or announcement fca.org.uk. Throughout, Compliance’s role is to maintain rigorous oversight, document every step, and ensure that the firm can demonstrate full compliance with regulatory requirements.

Key Controls and Best Practices to Mitigate Risk

In light of the above, firms should implement robust controls and governance practices around market soundings and wall-crossings. Below are some practical best practices for compliance and front-office teams, drawn from regulatory guidance and industry commentary:

• Information Barriers and “Need-to-Know” Controls: Only staff who absolutely need the deal information should have access to it fca.org.uk. Apply a need-to-know principle, keeping the circle of insiders as small as possible fca.org.uk. Use internal confidentiality classifications (mark documents as inside information) and secure handling (e.g. password-protected deal folders, no use of personal email) to prevent inadvertent leaks fca.org.uk. Internally, immediately add the issuer to your restricted list once planning begins, so no one outside the deal team accidentally trades the stock acuitykp.com. Ensure any employee brought “over the wall” internally (e.g. a sales person assisting with soundings) understands their obligations and is recorded on the insider list. Effective information barriers, sometimes called Chinese walls, are critical to avoid the spread of sensitive info within the firm.

• Gatekeeper Mechanism for Investors: Encourage or assist buy-side clients in using a gatekeeper model for soundings. Many asset managers appoint a compliance officer or designated person as an initial contact for wall-crossing requests fca.org.uk cosegic.com. This gatekeeper can vet the request and only involve portfolio managers if the sounding is accepted, thus insulating investment staff from unnecessary inside information. As the FCA notes, a gatekeeper approach promotes consistency and reduces leakage opportunities fca.org.uk. Sell-side firms should maintain up-to-date contact lists of who to approach at each institution for wall-crossing (often provided by the investor), ensuring soundings are channeled correctly. This also means if an investor declines a sounding, the insider information stops with the gatekeeper and may not flow to the portfolio manager – though both sides must still evaluate if even a declined approach conveyed any inside information indirectly fca.org.uk cosegic.com.

• Standardized Wall-Crossing Procedures: Develop a clear internal procedure for market soundings and train all relevant staff on it. This should include scripted language for the initial approach call – e.g. “We have a potential transaction involving [broad description] – are you willing to receive confidential inside information under MAR?” – and the follow-up if they say yes. The procedure must align with MAR’s steps: get explicit consent, explain the no-trading duty, and then share the minimum necessary details fca.org.uk cosegic.com. Have template insider acknowledgments or NDAs ready for investors to sign or respond to in writing if feasible (some firms send an email confirmation of wall-crossing terms). Also, never reveal more than needed at each stage. Especially in small or illiquid sectors, be mindful that even without naming the company, certain clues might allow a savvy investor to guess the issuer fca.org.uk cosegic.com. Periodically review these scripts and procedures against the latest guidance – for example, FCA Market Watch 75 suggests tailoring the amount of initial information to avoid unnecessary disclosure fca.org.uk.

• Comprehensive Record-Keeping: Maintain detailed records of every market sounding event. This includes who was contacted, when, and what was said or sent. Phone calls should be recorded where possible fca.org.uk. If not, follow up promptly with an email to the investor summarizing the discussion and get confirmation. Log each investor’s response (accepted or declined) and the timing. Record when an investor became wall-crossed and when they were cleansed later. Keep these records organized – MAR requires they be retained (five years is recommended) and available for regulators on request acuitykp.com acuitykp.com. Good record-keeping not only is a regulatory requirement but also protects the firm if questions arise. As a best practice, also document declined wall-crossings and the general reason (e.g. “Investor X declined due to conflict / no interest”) fca.org.uk – the FCA views tracking declined approaches as good practice to ensure even those instances are considered in insider risk management.

• Training and Awareness: Regularly train front-office teams (ECM bankers, sales, traders) and relevant compliance staff on insider information rules and the firm’s wall-crossing policies. Employees must recognize what constitutes inside information and the seriousness of improper handling. Before an employee engages in a wall-crossing call or receives an insider tip, ensure they have been briefed on the do’s and don’ts. For example, training should emphasize that trading on or divulging inside information is strictly prohibited and potentially a criminal offense fca.org.uk. Also train staff to identify situations where they might unintentionally receive inside info and how to escalate those to Compliance. Consider periodic refreshers, especially if regulations update. The FCA has highlighted that firms with a strong “compliance culture” – treating MAR compliance as “a state of mind” – tend to perform best in preventing market abuse fca.org.uk.

• Monitoring and Surveillance: Implement surveillance to detect any suspicious activity around the time of a market sounding. This can include monitoring market trading in the relevant stock for unusual volumes or price moves after investors were sounded but before news is public. Compliance can run checks to see if any wall-crossed clients made trades (through market data or transaction reports) that might indicate misuse. Internally, also monitor for any breaches of the restricted list (no employee trading the stock, no research reports issued, etc.). Post-transaction, review the chronology: if an investor’s trading behavior looks odd (e.g. they sold right after the wall-cross call and then bought in the placing), consider investigating and reporting it – the FCA noted such patterns with concern fca.org.ukcosegic.com. A strong post-trade surveillance process, combined with enforced pre-trade controls, helps catch and deter insider dealing acuitykp.com. Additionally, require personal account dealing pre-clearance for staff: anyone aware of the deal must be barred from trading related securities, and others should be pre-cleared against the restricted list acuitykp.com.

• Cleansing and Post-Deal Controls: After the transaction is completed (or if it is abandoned), it’s essential to “cleanse” insiders promptly. This means informing all recipients of inside info (investors and internal staff) that the information they held is now public or no longer material, freeing them to trade again fca.org.uk. Often, for a successful placing, the public announcement of the deal (pricing and terms via an RNS) serves to cleanse the information publicly. In some cases, a specific notification is sent to wall-crossed investors confirming that any restrictions are lifted. For withdrawn or postponed deals, a private cleansing email to insiders may be used to confirm the information is no longer active. Plan the cleansing strategy in advance – as part of deal planning, decide how insiders will be notified and by whom fca.org.uk. Clearly record when each insider is cleansed. This process not only is courteous to investors (allowing them to resume normal trading) but also prevents lingering insider risk. Additionally, conduct a post-mortem: if any issues or close calls occurred (e.g. an investor inadvertently got too much info in a decline scenario), update procedures or training to address these in the future.

• Leak Contingency Planning: Despite best efforts, leaks can happen (deliberately or accidentally). A well-prepared firm will have a plan for handling rumours or leaks of the deal before the official announcement fca.org.uk. This plan should designate who will decide on and draft an urgent market announcement if needed, and how to communicate with the issuer, exchange, and regulators swiftly. FCA guidance is clear: if inside information escapes into the market, the issuer should disclose it publicly as soon as possible, even if that means during trading hours fca.org.uk. Holding statements or “rumor announcements” can be used if needed to confirm that a potential transaction is in progress. The firm’s communications team and legal advisers should be looped into leak planning. Also, consider pre-preparing a leak announcement as a contingency (some firms draft an outline announcement in advance in case of leak). By reacting quickly and transparently to any leak, firms can mitigate market disruption and avoid the accusation of selective disclosure. And once the dust settles, investigate the source of the leak to shore up controls going forward.

Conclusion

Market sounding and wall-crossing are invaluable tools for executing equity placings, but they carry inherent risks of insider dealing and market abuse if not carefully managed. By adhering to the UK’s regulatory framework – UK MAR’s requirements, FCA guidance on best practices, and LSE’s expectations for timely disclosure – firms can conduct soundings in a compliant, controlled manner. Clear assignment of responsibilities to ECM teams, syndicate desks, and compliance officers is critical, as is a strong set of internal controls: information barriers, approved scripts, meticulous record-keeping, training, surveillance, and leak-response plans.

Compliance professionals should foster a culture where integrity and caution around inside information are ingrained in front-office behavior. This proactive, structured approach not only mitigates legal and reputational risks but also contributes to fair and orderly markets, helping maintain investor trust in the capital raising process. By following the best practices outlined above and staying abreast of regulatory developments, UK banks and brokers can confidently navigate market soundings and wall-crossings – enabling successful equity placings without compromising on compliance.