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In business, a Chinese wall is an information barrier implemented within a firm to separate and isolate persons who make investment decisions from persons who are privy to undisclosed material information which may influence those decisions. This is a way of avoiding conflict of interest problems.
In general, all firms are required to develop, implement, and enforce reasonable policies and procedures to safeguard insider information and to ensure that no improper trading occurs. Although specific procedures are not mandated, adopted practices must be formalized in writing and be appropriate and sufficient. Procedures should address the following areas: education of employees, containment of inside information, restriction of transactions, and trading surveillance.
The term was popularized in the United States following the stock market crash of 1929, when the U.S. government legislated information 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.
Objection to use of the phrase
At least one California judge has taken offense to the phrase Chinese Wall. In Peat, Marwick, Mitchell & Co. v. Superior Court 200 Cal.App.3d 272, 293–294, 245 Cal.Rptr. 873, 887–888 (1988), Presiding Justice Low wrote:
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.
Alternative phrases include screen (screening), firewall, cone of silence, and ethical wall. Screen or the verb to screen is the preferred term under the American Bar Association (ABA) Model Rules of Professional Conduct, a code of legal ethics that has been highly influential throughout the jurisdictions of the United States.
A Chinese wall is most commonly employed in investment banks, between the corporate-advisory area and the brokering department in order to separate those giving corporate advice on takeovers from those advising clients about buying shares. The "wall" is thrown up to prevent leaks of corporate inside information, which could influence the advice given to clients making investments, and allow staff to take advantage of facts that are not yet known to the general public. The term "already over the wall" is a phrase used by equity research personnel to refer to rank-and-file personnel who operate without the Chinese Wall barrier at all times. Examples include members of the Chinese Wall department, most compliance personnel, attorneys and certain NYSE-licensed analysts. The term "over the wall" is used when an employee who is not normally privy to wall-guarded information has somehow obtained sensitive information. Breaches considered semi-accidental were typically not met with punitive action during the heyday of the "dot-com" era. These and other instances involving conflicts of interest were rampant during this era. A major scandal was exposed when it was discovered that research analysts were encouraged to blatantly publish dishonest positive analyses on companies in which they, or related parties, owned shares (see Global Settlement), or on companies that depended on the investment banking departments of the same research firms. The U.S. government has since passed laws strengthening the Chinese wall concept (e.g. Sarbanes-Oxley Act, Title V) with the desire to more carefully formalize and prevent such conflicts.
Chinese walls are also used in the Corporate Finance departments of certain 'Big Four' accountancy firms. They are designed to insulate sensitive documentation from the wider firm in order to prevent conflicts of interest as described above.
The Chinese wall is regarded as breached for advertorial projects.
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 or with confidential information from an adverse party. In the United Kingdom, a law firm may represent competing parties in a suit, but only in strictly defined situations and when individual fee earners do not act for both sides In the United States, at least in Ohio, it is illegal for members of the same law firm to represent both sides of a legal conflict regardless of whether the individuals communicate about the case. To do so is considered a conflict of interest and can result in disciplinary action against the attorney or the firm that employs him or her. Even Legal Aid cannot represent both sides of a conflict.
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 (also Brewer and Nash 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.
- Investopedia. "The Chinese Wall Protects Against Conflicts Of Interest". Retrieved 13 February 2012.
- See Martin v MacDonald Estate (Gray)  1 WWR 705 at 715, as per Sopinka J.
- Model Rules of Profesional Ethics. The ABA Model Rules define screening as "the isolation of a lawyer from any participation in a matter through the timely imposition of procedures within a firm that are reasonably adequate under the circumstances to protect information that the isolated lawyer is obligated to protect under these Rules or other law." Ibid.
- Sharon D. Nelson; David K. Isom; John W. Simek (2006). Information Security for Lawyers And Law Firms. American Bar Association. pp. 25–. ISBN 978-1-59031-663-4. Retrieved 6 August 2012.
- Chinese Wall Definition | Investopedia
- Luyendijk, Joris (Friday 3 February 2012 09.00 GMT), "Equity finance banker: 'Don't underestimate the Japanese banks", The Guardian (London), retrieved 7 February 2012
- Solicitors Regulation Authority. "Rule 3: Conflict of interests". SRA guidelines rule 3.