The China Securities Regulatory Commission (CSRC) issued the Administrative Provisions on Sales Charges of Open-End Securities Investment Funds (Draft for Comment) in mid-October. As an encouragement to long-term investment, charges will be appropriately reduced for long-term holding of funds, but high punitive rates will be imposed if they are redeemed within a short time.

The provision most worthy of attention in the draft for comment is that “fund managers may not waive the backend load on investors who hold their funds for less than three years.” Handling charges will be reduced progressively for longer holding periods. For example, charges may be reduced to zero if the holding period exceeds three years.

Integrated charging rates will drop after the reform and investors will benefit from this measure, said a CSRC official in charge. However, while “encouraging” long-term investors, CSRC will also impose “penalties” on short-term “speculative trading”. According to the draft for comment, investors will be charged a redemption fee equivalent to no less than 1.5% of the redemption amount if they hold the funds for less than seven days, or a fee equivalent to no less than 0.75% of the redemption amount if they hold the funds for less than 30 days.

In the past, some institutional investors made use of the funds they manage for short-term arbitrage. Fast money results in fluctuations in their cash volume, which is why fund managers are sometimes forced to sell products with good prospects to maintain the original portfolio position. This will affect their fund performance and indirectly affect the interests of other medium- and long-term holders. The punitive rates of charges in the new provisions are intended to curb these short-term trading activities and protect the interests of long-term investors.

Meanwhile, the draft for comment also stipulates that fund distributors may not “reduce the levels of charges or offer lucky draws, rebates, gifts in kind or gifts in the form of insurance or fund shares when selling funds”, thus further regulating charges collected in the fund management business.