Information about Chinese Wall (financial)

In business, Chinese Walls are information barriers implemented within firms to separate and isolate persons who make investment decisions from persons who are privy to undisclosed material information which may influence those decisions.

In general, all firms are required to develop, implement and enforce reasonable policies and procedures to safeguard insider information, and to ensure no improper trading occurs. Although specific procedures are not mandated, adopted practices must be formalized in writing and must be appropriate and sufficient. Procedures should address the following areas: education of employees, containment of inside information, restriction of transactions, and trading surveillance.

Potential phrase origins

The term was popularized in the United States following the stock market crash of 1929, when the U.S. government legislated informational separation between investment bankers and brokerage firms, in order to limit the conflict of interest between objective analysis of companies and the desire for successful initial public offerings. Rather than prohibiting one company from engaging in both businesses, the government permitted the implementation of Chinese wall procedures.

The term "Chinese Wall" may refer to the Great Wall of China, and its scale and effectiveness at separating one side from the other. Alternatively, the term may originate from a reference to chinese standing screens which allow for the temporary installation of a wall in a room lacking the permanent architectual feature. This origin seems fitting for its usage in organizations such as law firms that create ad hoc barriers between offices or lawyers in order to protect against a conflict of interest.

Objection to use of the phrase

At least one California judge has taken offense to the phrase Chinese Wall. Peat, Marwick, Mitchell & Co. v.Superior Court 200 Cal.App.3d 272, 293-294, 245 Cal.Rptr. 873, 887-888 (1988) (Low, Presiding Justice, concurring), wrote:

I concur in the opinion of Justice Haning, but write separately to comment on the apparently widespread use of the term "Chinese Wall" to describe the type of screening mechanism discussed in this case. While our opinion uses the term "screen," both the parties and the trial court used the term "Chinese Wall,"which seems to have become a term of art. I write to express my profound objection to the use of this phrase in this context. The origin of the use of "Chinese Wall" in the context of confidentiality is unclear. Evidently, the term was casually coined in some appellate opinion, then picked up and used without question or explanation by courts and commentators. The unquestioned use of the term was perpetuated by a leading note on the subject, The Chinese Wall Defense to Law Firm Disqualification (1980) 128 U.Pa.L.Rev. 677, which is otherwise analytical and informative. (See lead opn., fn. 2, p. 878.) The enthusiasm for handy phrases of verbal shorthand is understandable. Occasionally, however, lawyers and judges use a term which is singularly inappropriate. "Chinese Wall" is one such piece of legal flotsam which should be emphatically abandoned. The term has an ethnic focus which many would consider a subtle form of linguistic discrimination. Certainly, the continued use of the term would be insensitive to the ethnic identity of the many persons of Chinese descent. Modern courts should not perpetuate the biases which creep into language from outmoded, and more primitive, ways of thought. It may be sobering to recall that little more than a century ago our own Supreme Court held that persons of Chinese ancestry could not testify in court against a person of Caucasian descent. In People v. Hall (1854) 4 Cal. 399, 404, the court, speaking through Chief Justice Hugh C. Murray, declared that "[t]he same rule which would admit them to testify, would admit them to all the equal rights of citizenship, and we might soon see them at the polls, in the jury box, upon the bench, and in our legislative halls." It is worth noting, given recent events on the American political stage, that language and attitudes once embodied in a judicial opinion would now lead to the removal of a Governor, and membership in groups adhering to those attitudes could lead to denial of confirmation for high public office. Aside from this discriminatory flavor, the term "Chinese Wall" is being used to describe a barrier of silence and secrecy. The barrier itself may work to further the cause of ethics in litigation; but the term ascribed to that barrier will necessarily be associated with constraints on the freedom of open communication. To employ in this context the image of the Great Wall of China, one of the magnificent wonders of the world and a structure of great beauty, is particularly inappropriate. One can imagine the response to the negative use of the images of the Eiffel Tower, the Great Pyramids of Cheops, or the Colossus of Rhodes. Finally, "Chinese Wall" is not even an architecturally accurate metaphor for the barrier to communication created to preserve confidentiality. Such a barrier functions as a hermetic seal to prevent two-way communication between two groups. The Great Wall of China, on the other hand, was only a one-way barrier. It was built keep outsiders out-not to keep insiders in. It is necessary to raise a clenched cry for jettisoning the outmoded legal jargon of a bygone time. If the image of a wall must be used, perhaps "ethics wall" is more suitable phraseology.

Another alternative phrase is "firewall"

Finance

A Chinese Wall is most commonly employed in investment banks, where such banks offer corporate finance services to companies (raising capital, for example), while at the same time providing financial research to a more general audience.

In spite of Chinese Walls, these conflicts of interest allegedly arose during the heydays of the "dot com" era, when research analysts published allegedly dishonest positive analysis on companies in which they, or related parties, owned shares. The U.S. government has since passed laws improving the Chinese Wall concept (e.g. Sarbanes-Oxley Act) with the desire to more carefully formalize and prevent such conflicts.

Law

Chinese Walls are used in law firms when one part of the firm, representing a party on a deal or litigation, is separated from another part with contrary interests. In the United Kingdom a law firm may represent competing parties in a suit, but only if there is no communication between partners.

Journalism

The term is also used in journalism to describe the separation between the editorial and advertising arms of a media firm.

The Chinese wall is regarded as breached for advertorial projects.

Computer science

In computer science, there are two common areas of usage: reverse engineering and computer security.

Chinese wall refers to a reverse engineering method involving two separate groups. One group reverse-engineers the original code and writes thorough documentation, while the other group writes new code based only on the new documentation. This method insulates the new code from the old code, so that it will not be considered a derived work. See also clean room design.

The Chinese Wall Model is a security model where read/write access to files is governed by membership of data in conflict-of-interest classes and datasets. This is the basic model used to provide both privacy and integrity for data. See also Brewer and Nash model.

See also

• Glass-Steagall Act