Fund managers, China regulators clash over ‘rat trap’

May 18th, 2010
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Contributed by: Emerging Manager Focus
Fund managers across China are crying foul over a China Securities Regulatory Commission (CSRC) proposal to tighten investment reporting requirements.

Some disgruntled managers even threatened to walk off the job after CSRC in late March released a draft version of the Guidelines for Management and Reporting of Stock Investments for Relatives of Fund Company Employees.

The guidelines would bar immediate relatives of fund employees from investing in stocks before reporting to obtaining fund-company permission. In addition, these relatives would not be allowed to open trading accounts except at certain, designated securities companies. The period for public comments is about a month, and the guideline is likely to be released within three months.

Current regulations are less strict: CSRC merely requires that close relatives of fund employees report basic information about their accounts and stock trades.

The new proposal, for which regulators are now gathering public comments, is supposed to prevent conflicts of interest. But so far it’s stirred up conflict of a different sort — a maelstrom in the investment fund industry.

Getting explicit

China’s fund-management industry frequently gets a sideways glance. Managers have long been suspected of dealing on inside information and so-called “rat trading,” which happens when a manager with special stock information profitably and secretly controls “rat accounts” for relatives or friends.

Regulators recently started clamping down. Four fund managers were charged with insider trading last year against the backdrop of a February 2009 decision by the Standing Committee of the National People’s Congress that elevated rat trading to a criminal offense.

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