The French AMF has fined heavily two banks that had sounded out the market in preparation of the pricing of a bond issuance without seeking the prior consent of the persons contacted and without such persons being informed that if they agree to participate in the poll, they would receive inside information. With the fines, the AMF points out that sections 621-1 (inside information) and 216-1 (sounding out the market) of its General Regulation also apply to bond issuances.
The French Autorité des marchés financiers ("AMF") has published on its website a decision of its Sanction Committee dated 17 March 2011 against two banks, which points out –firmly– that the provisions of its General Regulation (Règlement général) on sounding out the market are applicable to debt offerings, and not only equity offerings.
In preparation of the launch of a new bond issuance by an issuer, the lead managers had contacted potential investors to assess their interest in the new bonds prior to their pricing. The AMF alleges that two of the lead managers had not complied with the rules on sounding out the market, including failing to inform the persons contacted that if they agree to participate in the poll, they would receive inside information.
Article 216-1 of the AMF General Regulation provides that when an investment services provider sounds out the market in preparation of a financial transaction, it must seek the prior approval of the persons it intends to question and inform them that if they agree to participate in the poll, they would receive inside information within the meaning of Article 621-1 of the AMF General Regulation.
Article 216-1 of the General Regulations of the AMF [Free translation]
"When an investment services provider intends to poll the market in preparation of an issuance on the primary market or of the placement, acquisition or sale of financial instruments, it shall seek the prior approval of the persons it intends to question. It shall inform them that if they agree to participate in the poll, they will receive inside information within the meaning of Article 621-1.
The investment services provider shall establish and maintain a procedure setting forth how the compliance officer is to be informed of the poll and, following the poll, of the names of the persons who agreed to respond thereto and the times and dates on which they were contacted."
For the AMF, the communication of the main characteristics of the bonds to be issued (name of the issuer, benchmark size, maturity and spread range) did constitute an inside information that would allow an investor active on the bond market to take a view as to the possible effect of the announcement of the new issuance on the price of existing bonds of the same issuer, and therefore to base a decision to sell existing bonds and purchase bonds from the new issuance.
The term "financial instrument" (instrument financier) used in Articles 621-1 (inside information) and 216-1 (sounding out the market) of the AMF General Regulation covers both equity and debt securities (Article L.211-1 of the French Monetary and Financial Code), following the 2009 reform of financial instruments (French Ordinance No. 2009-15 dated 8 January 2009).
For the AMF, the sales teams of both banks did not follow the appropriate procedures when sounding out the market to measure potential investors' interest for the new bonds, by not informing the persons contacted that they would receive inside information.
On the basis of Article L 621-15 III of the French Monetary and Financial Committee (penalties applicable to investment services providers), the AMF issued a warning against the two banks and fined one bank €500,000 and the other one €400,000.
When sounding out the market in preparation of the launch of a bond issuance, banks contacting potential investors should (i) seek the prior approval of the persons they intend to question and (ii) inform such persons that if they agree to participate in the poll, they would receive inside information.
The full text, in French, of the decision of the Sanction Committee of the AMF dated 17 March 2011 is available at the following address:
http://www.amf-france.org/documents/general/9928_1.pdf
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