China Securities Regulatory Commission Issues Action Plan for Promoting High-Quality Development of Public Funds

According to the website of the China Securities Regulatory Commission (CSRC), in response to the decision made at the meeting of the Political Bureau of the Central Committee on September 26, 2024, to "steadily advance the reform of publicly offered funds," the CSRC recently publicly issued the "Action Plan for Promoting High-Quality Development of Publicly Offered Funds."

The Action Plan emphasizes the Party's comprehensive leadership over the publicly offered fund industry, underscores the political and people-oriented nature of the industry's development, adheres to an investor-centric development philosophy, and focuses on strengthening supervision, preventing risks, and promoting high-quality development. It explores the establishment of a new development model for publicly offered funds tailored to China's national and market conditions. Adhering to a problem-oriented and goal-oriented approach, the Action Plan proposes a series of reform measures that address market and societal concerns, urging industry institutions such as fund companies and fund sales agencies to shift their focus from "emphasizing scale" to "emphasizing returns," thereby forming a "turning point" for the industry's high-quality development. The Action Plan outlines 25 key measures, as follows:

1. Optimize the fee structure for actively managed equity funds. For actively managed equity funds, implement a floating management fee model linked to fund performance. For investors meeting certain holding period requirements, apply differentiated management fees based on the product's performance during their holding period. Management fees must be reduced for funds with significantly underperforming benchmarks, effectively reversing the phenomenon of fund companies "earning steady profits regardless of market conditions."

2. Strengthen the alignment of interests between fund companies and investors. Establish an industry evaluation system centered on fund investment returns, incorporating indicators directly related to investor interests, such as performance comparison against benchmarks and fund profitability, into the evaluation system. Correspondingly reduce the weight of indicators such as product management scale rankings and fund company revenues and profits in the evaluation. Increase the proportion and lock-up period requirements for fund company executives and fund managers to co-invest in the products managed by their own companies. Urge fund companies to establish and improve a compensation management system linked to fund investment returns, requiring a significant reduction in performance-based compensation for fund managers with poor medium and long-term performance, better reflecting the principle of "sharing weal and woe" with investors.

3. Enhance the industry's ability to serve investors. Guide fund companies and fund sales agencies to comprehensively optimize resource allocation in areas such as investment research, product design, risk management, and marketing, centered on the best interests of investors. Promote long-term, value-based, and rational investment practices, striving to deliver better returns to investors. Expedite the issuance of regulations governing the management of publicly offered fund investment advisors to promote the standardized development of fund investment advisory services, providing investors with portfolio investment services tailored to their characteristics and needs. Accelerate the launch of a direct sales service platform for institutional investors to facilitate their participation in fund investments.

IV. Enhance the Scale and Stability of Equity Investments in Public Funds. Optimize fund registration arrangements, introduce more on-exchange and off-exchange index funds and low-to-medium volatility equity products, and promote the innovative development of equity funds. Strengthen the binding force of fund product performance benchmarks, fully leverage their role in reflecting product positioning and measuring product performance, implement a long-term assessment cycle of over three years for fund investment performance, enhance the stability of public fund investment behavior, and promote the balanced development of capital market investment and financing.

V. Integrate the Promotion of Strong Regulation, Risk Prevention, and High-Quality Development. Improve regulatory systems, enrich enforcement measures, and ensure that "teeth and thorns" are put into practice. Enhance the governance level of fund companies, urge major shareholders, boards of directors, and management to fulfill their responsibilities. Improve the multi-level liquidity risk prevention and control mechanism in the industry, continuously improve industry compliance levels. Enhance the industry's reputation management capabilities, promote the positive narrative of the economy, and fully leverage the positive role of guiding and shaping expectations. Vigorously promote and practice the "Five Musts and Five Don'ts" of Chinese financial culture, and accelerate the construction of first-class investment institutions.

Next, the China Securities Regulatory Commission will steadily and orderly advance the implementation of various policy measures, promoting the industry's continuous improvement in serving residents' wealth management, the reform, development, and stability of the capital market, and the real economy and national strategy.

Action Plan for Promoting High-Quality Development of Public Funds

In recent years, China's public fund industry has played a positive role in serving the real economy and national strategy, promoting the reform, development, and stability of the capital market, and meeting residents' wealth management needs. However, it has also exposed issues such as deviations in business philosophy, insufficient functional performance, imbalanced development structure, and weak investor satisfaction. To accelerate the industry's high-quality development, this plan has been formulated.

I. General Requirements

Guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, thoroughly implement the decisions and deployments of the Third Plenary Session of the 20th CPC Central Committee, the Central Economic Work Conference, the Central Financial Work Conference, the September 26, 2024 meeting of the Political Bureau of the CPC Central Committee, and the new "State Nine Articles" on "steadily advancing public fund reform, promoting the high-quality development of securities and fund institutions, and supporting medium and long-term capital market entry." The following basic principles are mainly reflected: adhere to the Party's comprehensive leadership over financial work, unswervingly follow the path of financial development with Chinese characteristics, and build a public fund industry that meets the essential requirements of Chinese-style modernization; adhere to the main line of strong regulation, risk prevention, and high-quality development, correct the industry's development positioning, and achieve the organic unity of functionality and profitability; adhere to problem-oriented and goal-oriented approaches, effectively respond to market concerns, introduce a series of policy measures that investors can feel and benefit from, and solve prominent problems in industry development and regulatory mechanisms; adhere to investor-centric principles, urge industry institutions to firmly establish a business philosophy centered on the best interests of investors, and integrate it into the entire chain and all aspects of fund operation and management, including corporate governance, product issuance, investment operations, and assessment mechanisms, adhering to the fiduciary duty of "entrusted by others, loyal to others," and achieve a transformation from focusing on scale to focusing on investor returns; adhere to the direction of marketization and legalization, draw on international mature experience, explore and establish a new industry development model that suits China's national conditions and market conditions, and strive to solidly promote the implementation of various policy measures within about three years, forming a "turning point" for the high-quality development of the industry.

II. Optimize the fund operation model and establish a sound mechanism linking fund company revenue and compensation to investor returns

1. Establish a floating management fee collection mechanism linked to fund performance. Actively promote a floating management fee collection model based on performance benchmarks for newly established actively managed equity funds. For investors who meet certain holding period requirements, determine the specific applicable management fee rate based on the product's performance during their holding period. If the actual performance of the product during the holding period aligns with the performance benchmark for the same period, the benchmark fee rate shall apply; if it is significantly lower than the performance benchmark for the same period, a lower fee rate shall apply; if it significantly outperforms the performance benchmark for the same period, a higher fee rate shall apply. Within the next year, guide leading industry institutions with significant management scales to issue at least 60% of such funds in proportion to their actively managed equity fund issuances. After a one-year trial period, promptly conduct an evaluation, optimize and improve the mechanism, and gradually roll it out comprehensively.

2. Strengthen the binding effect of performance benchmarks. Formulate regulatory guidelines for performance benchmarks of publicly offered funds, clarifying the setting, modification, disclosure, ongoing assessment, and correction mechanisms for performance benchmarks of fund products. Implement strict supervision over fund companies' selection of performance benchmarks to ensure they effectively determine product positioning, clarify investment strategies, represent investment styles, measure product performance, and constrain investment behavior.

3. Enhance transparency. Revise the information disclosure template for actively managed equity funds, emphasizing the disclosure of fund product performance and tiered management fee collection. Comprehensively present information such as medium and long-term product performance, comparison with performance benchmarks, investor profit and loss situations, turnover rates, comprehensive product fee rates, and actual management fees collected by managers, to improve the readability, conciseness, and relevance of information disclosure.

4. Steadily reduce costs for fund investors. Issue the "Regulations on the Management of Sales Fees for Publicly Offered Funds" to reasonably adjust and reduce subscription and redemption fees, as well as sales service fees for publicly offered funds. Guide industry institutions to appropriately lower management and custody fee rates for large-scale index funds and money market funds at appropriate times. Promote the reduction of fixed costs related to fund registration and settlement, index licensing, information disclosure, auditing, and legal services.

III. Improve the industry's performance evaluation system and comprehensively strengthen long-cycle performance evaluation and incentive and restraint mechanisms

5. Reform the performance evaluation mechanism of fund companies. Issue regulations on the performance evaluation management of fund companies, requiring them to comprehensively establish a performance evaluation system centered on fund investment returns, appropriately reducing the weight of operational indicators such as scale rankings, revenue, and profits in performance evaluations.The fund investment return indicators should cover the performance of fund products and the profit and loss situation of investors. The former includes indicators such as the growth rate of the fund's net asset value and comparison with the performance benchmark, while the latter includes indicators such as the fund's profit margin and the proportion of profitable investors. For the assessment of fund company executives by shareholders and the board of directors, the weight of fund investment return indicators should be no less than 50%. For the assessment of fund managers, the weight of fund product performance indicators should be no less than 80%. A long-term assessment mechanism for fund investment returns should be fully implemented, with the weight of medium and long-term returns over three years being no less than 80%.

6. Strengthen the guiding role of regulatory classification evaluations. Incorporate indicators such as investor profit and loss and their proportion, comparison with the performance benchmark, the proportion of equity funds, and the evaluation of investment and research capabilities into the evaluation indicator system for fund companies. Increase the bonus points for indicators such as medium and long-term performance over three years, the scale of self-purchased equity funds under the company's management, the stability of investment behavior, and the growth scale of equity investments by 50% from the existing basis. The combined weight of the aforementioned indicators in the "ability to serve investors" score should be no less than 80%.

7. Reshape the industry's evaluation and award landscape. Revise the "Interim Measures for the Administration of Public Fund Evaluation Business" and related self-regulatory rules to establish an evaluation and award system centered on long-term performance over five years, optimize the indicators for fund evaluation and awards, increase the weight of indicators such as investor profit and loss and comparison with the performance benchmark, and eliminate unreasonable evaluation and award activities guided by short-term performance rankings. Strengthen regulatory enforcement, enhance the professionalism and independence of evaluations and awards, promote the exit of unqualified evaluation and award institutions from the market, and crack down on unlicensed institutions conducting evaluation and award activities in violation of regulations.

8. Urge the industry to strengthen salary management. Improve the salary management system for securities and fund management institutions, and urge fund companies to establish and improve a salary management mechanism linked to fund investment returns. Strengthen the mandatory co-investment ratios and lock-up period requirements for fund companies, executives, and fund managers. Strictly implement the deferred payment system for performance-based salaries of fund company executives and key personnel, and legally recover and deduct the salaries of those responsible for serious violations of laws and regulations. For fund managers whose product performance over three years is more than 10 percentage points below the performance benchmark, their performance-based salaries should significantly decrease. For fund managers whose product performance over three years significantly exceeds the performance benchmark, their performance-based salaries can be reasonably and moderately increased.

IV. Vigorously Increase the Scale and Proportion of Equity Investments in Public Funds to Promote the Industry's Function

9. Strengthen regulatory guidance and institutional supply. In the regulatory classification evaluation of fund companies, significantly increase the weight of indicators related to equity funds, highlight the development orientation of equity funds, and strengthen the application of classification evaluation results in accordance with the law.Formulate guidelines for publicly offered funds to participate in financial derivatives investments, to better meet the needs of publicly offered funds in strengthening risk management, stabilizing investment behavior, and diversifying investment strategies.

10. Promote the innovative development of equity fund products. Actively support the innovative development of actively managed equity funds, and explore the launch of more variable fee-rate fund products that are linked to fund performance, bound to investor returns, and encourage long-term holding. Vigorously develop various on-exchange and off-exchange index funds, and continuously enrich thematic equity index funds that align with national strategies and development orientations. Research and create pilot products for off-exchange broad-based index funds specifically designed to participate in swap facilitation operations.

11. Optimize the registration arrangements for equity funds. Implement a fast-track registration mechanism for Exchange-Traded Funds (ETFs). In principle, complete the registration within 5 working days from the date of acceptance. For actively managed equity funds and mature off-exchange broad-based equity index funds, complete the registration within 10 working days from the date of acceptance, in principle. For hybrid funds and bond funds with a clearly stipulated minimum shareholding ratio requirement, complete the registration within 15 working days from the date of acceptance, in principle.

12. Establish a classification and evaluation mechanism for fund sales institutions. Incorporate indicators such as the scale and proportion of equity funds held, the scale and proportion of initial public offering products held, investor profit and loss and holding periods, and the scale of regular investment business into the evaluation index system. For fund sales institutions with high classification and evaluation results, give priority consideration in product access, license applications, and innovative businesses in accordance with the law. Urge fund sales institutions to improve their internal assessment and incentive mechanisms, and increase the weight of assessing the profit and loss situation of held investors.

V. Promote High-Quality Development of the Industry and Accelerate the Construction of First-Class Investment Institutions

13. Improve the governance of fund companies. Revise the "Governance Standards for Securities Investment Fund Management Companies," fully leverage the functions of major state-owned shareholders in the corporate governance structure, and promote the fulfillment of duties by the board of directors and management. Reform and optimize the selection and appointment mechanism for independent directors of fund companies, enhance the professionalism and independence of their performance, and better play a supervisory role. Prevent improper interference from major shareholders and insider control.

14. Strengthen the construction of core investment and research capabilities. Establish an evaluation index system for the investment and research capabilities of fund companies, guide fund companies to continuously increase resource inputs in human resources and systems, accelerate the construction of an investment and research system featuring "platform-based, integrated, and multi-strategy" approaches, support the team-based management model for fund managers, and expand and strengthen the investment and research teams. Encourage fund companies to increase research and application of emerging technologies such as artificial intelligence and big data, and support qualified fund companies to establish technology and operational service subsidiaries.Support fund management companies in implementing long-term incentive measures, such as employee stock ownership plans, in accordance with the law to enhance the stability of their core teams.

15. Enhance the level of investor services. Actively encourage fund management companies to focus on improving their service capabilities for various types of medium and long-term funds, and explore the creation of fund products that are better suited for individual pension investments. Launch the official operation of the direct sales service platform for institutional investors in the industry, providing centralized, standardized, and automated "one-stop" data and information exchange services for institutional investors investing in publicly offered funds. Issue the Administrative Measures for Securities and Fund Investment Advisory Business and the Administrative Provisions on Investment Advisory Business for Publicly Offered Securities Investment Funds to promote the standardized development of fund investment advisory services.

16. Support the coordinated development of various types of fund products. Revise the Administrative Measures for the Operation of Publicly Offered Funds to improve and optimize the establishment criteria, continuation conditions, and exit mechanisms for publicly offered funds, further refine product classification standards, orderly expand the investment scope and strategies of publicly offered funds, and enhance the operational flexibility of publicly offered funds. Increase efforts to create medium-to-low volatility products with equity exposure and asset allocation products, revise and improve the rules for funds of funds (abbreviated as FOF in English), pension target funds, and other products to meet the needs of investors with different risk appetites, and promote the coordinated development of equity investments and fixed-income investments.

17. Optimize the development landscape of the industry. Support the innovative development of high-quality leading fund management companies to promote the dual enhancement of asset management and comprehensive wealth management capabilities. Formulate demonstration plans for the high-quality development of small and medium-sized fund management companies to support their specialized operations and differentiated development. Issue the Administrative Measures for the Operation Service Business of Publicly Offered Funds to promote the reduction of information technology system leasing and usage fees, helping industry institutions reduce costs and increase efficiency. Support the market-oriented mergers and acquisitions and restructuring of fund management companies, and promote the exit of severely non-compliant institutions in accordance with the law.

18. Consolidate the cultural foundation of the industry. Establish and improve an evaluation system for the construction of industry culture, conduct regular assessments and feedback, and increase the promotion of positive role models. Improve the self-regulatory guidelines for the professional ethics of practitioners to better leverage the role of industry self-regulation and supervision. Conduct regular on-site inspections of integrity in the workplace, strengthen the comprehensive governance of the "revolving door" phenomenon between government and business in the industry, and vigorously promote and practice the financial culture with Chinese characteristics of "five musts and five must-nots."

VI. Safeguard the Risk Bottom Line and Enhance the Intrinsic Stability of Industry Development

19. Improve the multi-level liquidity risk prevention and control mechanism of the industry. Issue operational guidelines for publicly offered funds participating in swap facilities to clarify the business norms for publicly offered funds to address liquidity risks through swap facilities. Revise the Administrative Measures for the Supervision and Management of Risk Reserves for Publicly Offered Funds to optimize the industry's risk reserve management system, reasonably set and dynamically adjust the provisioning ratio based on the classification evaluation results and risk status of fund management companies, and explore the expansion of the investment scope and usage purposes of risk reserves.

20. Strengthen guidance on the long-term investment behavior of funds. Establish a normalized counter-cyclical adjustment mechanism to dynamically adjust the pace and progress of product registration based on market conditions. Strengthen the supervision of thematic fund registration, introduce self-regulatory rules for monitoring the investment styles of thematic funds, and enhance the monitoring, analysis, and follow-up inspection of fund investment transactions. Supervise and guide fund companies to improve their new share pricing decision-making mechanisms to promote reasonable and prudent pricing. Reasonably restrict the number and scale of products managed by individual fund managers, and strengthen the monitoring and risk warnings regarding the concentration of stock holdings by fund managers with large management scales. Introduce rules for public funds to participate in the governance of publicly listed firms to help improve the quality of these firms.

21. Continuously improve the industry's compliance level. Revise the "Guidelines for Fund Managers to Serve as Investment Managers for Privately Offered Asset Management Plans" to raise the requirements for fund managers to concurrently serve in public and private funds and for the isolation of business risks. Strengthen the supervision of fund companies providing investment advisory services externally. Continuously and prudently clean up channel-like businesses. Strictly investigate and severely punish violations such as leaking dividend information, assisting in tax evasion, and transferring improper benefits during the sales process. Urge fund companies to strengthen internal management and increase accountability efforts.

22. Enhance the industry's reputation management and expectation-guiding capabilities. Urge fund companies to improve their reputation risk management mechanisms, strengthen public opinion monitoring and response, and promptly respond to false information and sensitive public sentiments. Resolutely implement the decisions and deployments of the CPC Central Committee, advocate for a positive economic outlook, provide policy interpretations and public opinion guidance in the areas of macroeconomics, social well-being, and the capital market, and fully leverage the industry's positive role in guiding and shaping expectations. Support fund companies in actively safeguarding their rights, utilizing legal and administrative regulatory means to jointly combat acts such as fabricating and spreading false information, and extortion.

VII. Strengthen Regulatory Enforcement to Ensure "Tough and Effective" Measures

23. Further increase the supply of legal frameworks. Promote the revision of the "Securities Investment Fund Law of the People's Republic of China" to strengthen the supply of institutional frameworks in key areas such as fund company shareholders' equity, corporate governance, fund operations, personnel management, and market exits, enrich regulatory enforcement tools, and significantly increase the costs of violations. Promote the strengthening of the connection between administrative law enforcement and criminal justice to strictly combat serious illegal and criminal activities such as trading based on undisclosed information, insider trading, and market manipulation.

24. Strictly enforce equity and senior management access requirements for industry institutions. Tightly control the access of fund companies and fund sales institutions, strengthen the review of shareholders' qualifications, continuously strengthen the thorough verification of the equity structure and capital sources of equity participants, and severely crack down on violations such as equity nominee arrangements, private equity transfers, and equity investments with non-proprietary funds.We will expedite the introduction of the Administrative Measures for the Custody Business of Securities Investment Funds to raise the entry threshold for custodian institutions. We will improve the management system for the appointment of senior executives in fund companies, raise the requirements for their performance of duties, and include executives who violate laws and regulations in the integrity archives in accordance with the law, subjecting them to relevant occupational restrictions.

25. Strengthen the enforcement of laws, regulations, and systems. We will establish a mechanism for sharing best practices in the industry and increase the transparency of enforcement standards and typical cases. We will intensify cross-jurisdictional inspections, enhance the use of technological means, and improve the ability to identify problems. We will persist in taking strong and decisive actions against major violations, coordinate the implementation of administrative penalties, administrative regulatory measures, and self-regulatory measures to ensure strict yet orderly and effective enforcement. We will steadily disclose information on administrative regulatory measures taken against fund companies and their practitioners. We will establish a mechanism for notifying, warning, and educating on serious violations of laws and regulations.