Chinese wall

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 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.

Contents

Popularization

The term was popularized[citation needed] 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.

Other alternative phrases include screen (screening[1]), 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,[2] a code of legal ethics that has been highly influential throughout the jurisdictions of the United States.[3]

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.[4]

In spite of Chinese walls, these conflicts of interest arose during the heyday of the "dot-com" era, when research analysts published dishonest positive analysis on companies in which they, or related parties, owned shares (see Global Settlement). 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 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[5] 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 him or her. 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

References

  1. ^ See Martin v MacDonald Estate (Gray) [1991] 1 WWR 705 at 715, as per Sopinka J.
  2. ^ Model Rules of Profesional Ethics. http://www.abanet.org/cpr/mrpc/rule_1_0.html. 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.
  3. ^ http://www.halt.org/reform_projects/lawyer_accountability/discipline_system/rules_of_conduct/; http://www.aallnet.org/products/pub_sp0809/pub_sp0809_Legal.pdf; Sharon D. Nelson, David K. Isom, John W. Simek, Information security for lawyers and law firms. American Bar Association. 2006.
  4. ^ http://www.investopedia.com/terms/c/chinesewall.asp
  5. ^ Solicitors Regulation Authority. "Rule 3: Conflict of interests". SRA guidelines rule 3. http://www.sra.org.uk/solicitors/code-of-conduct/rule3.page. 

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