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Chinese wall is a business term describing an information barrier within an organization that was erected to prevent exchanges or communication that could lead to conflicts of interest. For example, a Chinese wall may be erected to separate and isolate people who make investments from those who are privy to confidential information that could influence the investment decisions. Firms are generally required by law to safeguard insider information and ensure that improper trading does not occur. The term has been declared to be politically incorrect in the 21st century, with "information barriers" preferred.

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Etymology

The origin of the phrase is the Great Wall of China. 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 company analysis 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.

A leading note on the subject published in 1980 in the University of Pennsylvania Law Review titled "The Chinese Wall Defense to Law-Firm Disqualification" perpetuated the use of the term.

Objections to the term

There have been disputes about the use of the term for some decades, particularly in the legal and banking sectors. The term can be seen both as culturally insensitive, and an inappropriate reflection on Chinese culture and trade, which is now extensively integrated into the global market. In Peat, Marwick, Mitchell & Co. v. Superior Court (1988), Presiding Justice Harry W. Low, a Chinese American, wrote a concurring opinion specifically in order "to express my profound objection to the use of this phrase in this context". He called the term a "piece of legal flotsam which should be emphatically abandoned", and suggested "ethics wall" as a more suitable alternative. He maintained that the "continued use of the term would be insensitive to the ethnic identity of the many persons of Chinese descent".

Alternative phrases include "screen", "firewall", "cone of silence", and "ethical wall". "Screen" or the verb "to screen" is the preferred term of the American Bar Association Model Rules of Professional Conduct.

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Usage in specific industries

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.

The phrase "already over the wall" is used by equity research personnel to refer to rank-and-file personnel who operate without the Chinese wall 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 somehow obtains 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, 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 such as Title V of the Sarbanes-Oxley Act in order to prevent such conflicts of interest.

Chinese walls are also used in the corporate finance departments of the "Big Four" and other large accountancy and financial services firms. They are designed to insulate sensitive documentation from the wider firm in order to prevent conflicts.

Journalism

The term is used in journalism to describe the separation between the editorial and advertising arms. 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 of the firm with contrary interests or with confidential information from an adverse party. Under UK law, a 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, the use of "Chinese Walls" is no longer permitted except within very narrow exceptions. The American Bar Association Model Rules of Professional Conduct (2004) state: "While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7 or 1.9, unless the prohibition is based on a personal interest of the prohibited lawyer and does not present a significant risk of materially limiting the representation of the client by the remaining lawyers in the firm." Although ABA rules are only advisory, most U.S. states have adopted them or have even stricter regulations in place.

Computer science

In computer science, the concept of a Chinese wall is used by both the operating system for computer security and the US judicial system for protection against copyright infringement. In computer security it concerns the software stability of the operating system. The same concept is involved in an important business matter concerning the licensing of each of a computer's many software and hardware components.

Any hardware component that requires direct software interaction will have a license for itself and a license for its software "driver" running in the operating system. Reverse engineering software is a part of computer science that can involve writing a driver for a piece of hardware in order to enable it to work in an operating system unsupported by the manufacturer of the hardware, or to add functionality or increase the performance of its operations (not provided by the manufacturer) in the supported operating system, or to restore the usage of a piece of computer hardware for which the driver has disappeared altogether. A reverse engineered driver offers access to development, by persons outside the company that manufactured it, of the general hardware usage.

Reverse engineering

There is a case-law mechanism called "clean room design" that is employed to avoid copyright infringement when reverse engineering a proprietary driver.

It involves two separate engineering groups separated by a Chinese wall. One group works with the hardware to reverse engineer what must be the original algorithms and only documents their findings. The other group writes the code, based only on that documentation. Once the new code begins to function with tests on the hardware, it is able to be refined and developed over time.

This method insulates the new code from the old code, so that the reverse engineering is less likely to be considered by a jury as a derived work.

Computer security

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

Source of the article : Wikipedia