Draft rules for funds to protect investors

China's latest move to refine how mutual funds measure and evaluate performance marks a shift toward a more disciplined, quality-oriented capital market, experts said.

They added that this would make fund managers more accountable and better align investment practices with investor interests.

The comments came after the China Securities Regulatory Commission unveiled a draft guideline on Friday to enhance the role of performance benchmarks in regulating mutual fund investments by standardizing the selection and use of such benchmarks. The draft is open for public feedback until Nov 29.

Sources said the reform will bring China's mutual fund performance benchmark system generally in line with international standards, while featuring a regulatory requirement that links fund managers' compensation to fund performance relative to benchmarks.

Under the draft guideline, performance benchmarks must reflect a fund's core strategy and investment style as defined in its contract and cannot be changed arbitrarily. Fund management companies must establish comprehensive internal controls to maintain stable investment styles. It also emphasizes the role of benchmarks in performance evaluations and calls for strengthened information disclosure and oversight by fund custodians.

Regulators will guide the industry through a one-year transition period to ensure existing products adjust their benchmarks smoothly, avoiding market disruption.

Analysts said that previously, a lack of systematic rules led to deviations in some actively managed equity funds, affecting investor returns. Once implemented, the new guideline will fill regulatory gaps, promote clearer investment styles, better protect investors and help attract long-term capital.

Managers of actively managed equity funds whose long-term performance significantly lags behind benchmarks will see a marked reduction in performance-based pay, according to the draft guideline.

This aligns with an action plan released by the CSRC in May to foster high-quality development of the mutual fund industry. According to the plan, managers whose over-three-year results fall more than 10 percentage points below the benchmark would see a notable cut in performance-based compensation, while those who outperform significantly may receive appropriate rewards.

The Asset Management Association of China — the self-regulatory organization for the mutual fund industry — will soon issue supporting self-discipline measures to facilitate this compensation mechanism, sources said. The association has released draft operational details to implement the overall reform.