SHANGHAI, Dec 10 (Reuters) - China's securities regulator has published draft rules aimed at slashing trading commissions for mutual funds and addressing the conflict of interest between the securities trading and fund sales businesses of brokerages, the latest reform to the $3.8 trillion mutual fund industry.

The China Securities Regulatory Commission (CSRC) said the proposals were designed to protect investors and better regulate the way fund managers allocate trading commissions.

The rules, published by the CSRC for public consultation on Friday, are the latest attempt by authorities to revive confidence in the sluggish stock market and comes five months after the regulator urged mutual funds to cut management fees and reduce costs for investors.

Analysts say the new rules would benefit brokerages with strong trading and research capabilities win commissions.

According to the draft rules, trading commissions would be reduced for both passive and active fund products. SWS Research estimates that overall commissions would be slashed by one third.

In addition, fund managers are banned from paying trading commissions to buy third-party services such as external expert consultancy, financial terminals or databases.

Market participants say it is common for mutual funds to pay brokers additional commissions for services whose value is hard to justify, pushing up trading costs for fund investors.

The draft rules also require the sales team of the mutual funds to not participate in choosing a broker and allocating trading commissions.

The proposed rules also require that a mutual fund company must not pay more than 15% of its total trading commissions to a single brokerage, the CSRC said, adding that fund managers should choose brokerages that are "financially sound, well-behaved, and have strong capabilities in trading and research".

The rules "will guide the brokerage business back to its root, back to research," Founder Securities said.

Kaiyuan Securities expects the CSRC to tighten regulation over fund distribution fees in the next stage of the reform. (Reporting by Shanghai Newsroom; editing by Miral Fahmy)