The China Securities Regulatory Commission unveiled a draft guideline on Friday to enhance the role of performance benchmarks in regulating mutual fund investments, marking a key step to refine capital market rules and align them more closely with mature overseas markets.

According to reliable experts, the implementation of the guideline will bring China's mutual fund performance benchmark system in line with international standards, while introducing a feature that links fund managers' compensation to the funds' performance relative to these benchmarks as a regulatory requirement.

In a statement, the CSRC said the guideline is aimed at standardizing the selection and use of benchmarks to ensure that they accurately reflect the investment styles of funds to better regulate their investment behavior, measure their performance and protect investors' rights. The draft is open for public feedback until Nov 29.

According to 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 control mechanisms to maintain stable investment styles. The guideline also emphasizes the role of benchmarks in performance evaluations and calls for strengthened information disclosure and oversight by fund custodians.

A notable provision is the establishment of a compensation mechanism tied to investment returns as a regulatory requirement. Managers of actively-managed, equity-focused funds whose long-term performance significantly lags behind their benchmarks will see a marked reduction in performance-based pay. The Asset Management Association of China will soon issue supporting self-discipline measures to facilitate this mechanism.

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

Industry analysts said that prior to the guideline, there was a lack of specialized and systematic rules for performance benchmarks, leading to significant deviations in some actively-managed, equity-focused funds which negatively impacted investor returns. Once implemented, the new draft guideline is expected to fill regulatory gaps, promote clearer investment styles, better protect investors' interest and help attract more medium to long-term capital into the market.