This was the first opportunity for lawmakers to debate the draft amendment to the Law on Securities Investment Funds submitted to the National People's Congress (NPC) Standing Committee.

The funds law went into effect in June 2004, but did not bring China's emerging privately offered funds under supervision, resulting in increasing risks to the country's financial system and social stability.

"Some managers of privately offered funds conduct illegal fundraising activities by borrowing in the name of private funds, harming investors' interests by not imposing strict supervision on the managers," Wu Xiaoling, vice chairperson of the NPC's Financial and Economic Committee, said when briefing the lawmakers.

"Without specific supervision over privately offered funds, rogue trading and insider trading by managers will be rampant despite crackdown campaigns."

Li Xuli, a former key manager of the Bank of Communications Schroder Fund Management Co., Ltd., was arrested and charged as a rouge trader who caused investors to lose more than 10 million yuan.

If the court returns a guilty verdict, Li's case will be the largest rouge trader scandal in China's securities history and demonstrates the dangers of a loose regulatory environment.

According to Wu, 69 fund management firms around China managed total fund assets with a net value of 2.2 trillion yuan (338.4 billion U.S. dollars) as of the end of 2011, 8.5 times the net value of fund assets in 2003.

The market value of securities investment funds accounted for 7.7 percent of negotiable market value of the Shanghai and Shenzhen bourses as of the end of 2011, making it the most important institutional investor in China's security market.

The draft amendment also introduces two new types of fund organizations -- unlimited liability fund and board fund -- in a move to better protect investors' interests.

Managers in an unlimited liability fund will bear unlimited joint and several liability for the fund's debts. In a board fund, a board will be established through a fund shareholders' assembly as a standing organization to supervise fund managers.

"The legislature effort for the draft amendment will introduce specific and strict regulations over privately offered funds and improve environment of funds and security markets," said Hu Lifeng, general manager of the funds research center under China Galaxy Securities.

The draft law will also help ease investor's worries and concerns about the uncertaintiues of how investors behave under privately offered funds, Hu added.