Moves by many former officials at the China Securities Regulatory Commission (CSRC) to top positions at fund management firms is creating concerns about potential conflicts of interest when it comes to enforcing securities rules, especially those applying to insider trading.
Publicly available information shows that 28 executives of fund management firms are former officials from the securities watchdog agency, the CSRC.
Those executives include the CSRC's former chairman, Zhou Daojiong, who now is independent director of China International Fund Management Co, and also the CSRC's former vice chairman Fu Fengxiang, who is independent director of Galaxy Asset Management Co.
"It seems there is a tide of CSRC officials moving over to work at the fund management companies. For the officials, they could get much better salaries than in the government sector. For the fund management companies, they could be sheltered by these former CSRC officials," said Cao Zhongming, an independent commentator.
"That might explain why many fund management companies can avoid the scandals of their fund managers investigated for insider training," Cao said.
In June, Zhang Ye, a fund manager with Rongtong Fund Management Co, was punished by the CSRC for insider trading. Zhang had the money he earned confiscated, and he was fined 4 million yuan.
However, the company where he worked did not receive punishment. The case involved "a personal problem", according to the notice released by the CSRC.
Zhang Kaiping, a legal analyst with the Chinese Academy of Social Sciences, questioned that logic.
"It was not only Zhang's personal problem. The company should review its corporate governance, internal controls and whether other staff was involved in similar illegal behavior," Zhang said.
According to the law on fund management of investments in securities, fund management companies should take responsibility for the illegal behavior of their staff.
Zhang said he was concerned at what he identified as apparent tolerance shown by the securities watchdog agency toward illegal behavior by fund managers.
In April last year, the CSRC punished two fund managers for insider trading: Tang Jian, of China International Fund Management Co Ltd, and Wang Limin of China Southern Fund. They were the first prosecutions of their kind in China' s mutual fund history.
Both were fined, had the money they earned confiscated and were dismissed from their jobs. However, neither of the fund management firms was fined.
This February, the Standing Committee of the National People's Congress, China's top legislature, expanded the ban on insider trading so that fund managers involved in insider trading could face criminal prosecution.
According to the amendment, employees of financial institutions who take advantage of non-public information for personal trading gains can now be jailed for five to 10 years.
According to the CSRC, the watchdog agency investigated 33 insider trading cases in the first half of this year. The CSRC also said it would keep a close eye on insider trading for the to-be launched growth enterprise board.
"Fund managers had been a respectable profession. However, I feel somewhat shamed now because of frequently exposed insider trading in this industry," said a fund management company investment director who asked not to be named.
Industry experts said the cases might just be the tip of the iceberg, and that more cases could be discovered if investigations were more thorough.
In the past, several fund managers who behaved illegally were exposed by people who knew them outside work, including former wives and girlfriends, rather than by the regulators.
"In the US securities market in the early days, a popular sentiment on Wall Street was that insider trading was the only effective way of achieving successful investments. Now the US had developed a set of effective measures to control insider trading," said Lu Junlong, an analyst with China Finance Online.