Chinese wall
From Wikipedia, the free encyclopedia
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.
Contents |
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.
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. |
” |
Another alternative phrase is "firewall"
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 strengthening the Chinese Wall concept (e.g. Sarbanes-Oxley Act) with the desire to more carefully formalize and prevent such conflicts.
The term is also used in journalism to describe the separation between the editorial and advertising arms of a media firm. An example of this wall being breached was with Gamespot firing Jeff Gerstmann[citation needed]
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]
The Chinese wall is regarded as breached for advertorial projects.