Chinese wall

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In business, a Chinese wall or firewall 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 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 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.

Currently, most legal ethics courses teach that the term should no longer be used because the term stereotypes^{[citation needed]}, and also negatively racializes^{[citation needed]}, people of Chinese ethnic descent. Instead, the term "ethical wall" is the politically correct word to use.^{[citation needed]} Internally, however, organizations still use the term "Chinese wall".

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(This may be obvious or even coincidental: a feature of the Great Wall of China is that it is an internal barrier within China as opposed to being on one of its frontiers, and hence the metaphor for an internal information barrier within a company.)

A completely alternate way to describe this metaphor, understood in financial circles, recognizes the ineffectiveness of a "wall" created of policies and official procedures in a company which has every incentive to unofficially ignore them. A more accurate comparison would NOT be the Great Wall of China, which was intended to keep two distinct cultures completely apart, but would mean a paper wall, one that can be seen through, heard through, broken down easily, and replaced with no evidence.

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:

Other alternative phrases include "firewall" and "cone of silence."

Finance

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.^[1]

In spite of Chinese walls, these conflicts of interest allegedly arose during the heyday 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 strengthening the Chinese wall concept (e.g. Sarbanes-Oxley Act) 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. Due to the proximity of conflicting departments in big four firms, physical walls are often used.^{[citation needed]}

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.

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.^{[citation needed]}In the United States, at least in Ohio,^{[citation needed]} 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 them. Even Legal Aid^{[citation needed]} cannot represent both sides of a conflict.

Computer science

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

Reverse engineering

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.

Computer security

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.

See also

• Glass-Steagall Act
• Brewer and Nash model
• Great Firewall of China

References