Chinese wall
Encyclopedia
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 transaction
s, and trading surveillance
.
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 offering
s. Rather than prohibiting one company from engaging in both businesses, the government permitted the implementation of Chinese wall procedures.
v. Superior Court 200 Cal.App.3d 272, 293–294, 245 Cal.Rptr. 873, 887–888 (1988), Presiding Justice Low wrote:
Other 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.
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.
to describe the separation between the editorial and advertising
arms of a media firm.
The Chinese wall is regarded as breached for advertorial
projects.
s 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.
, there are two common areas of usage: reverse engineering
and computer security
.
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
.
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.
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
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
Education
Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...
of employees, containment of inside information
Inside Information
Inside Information is the sixth studio album by American rock band Foreigner, released in 1987. The album hit #15 on the Billboard 200 Albums Chart and was certified Platinum in the U.S. for sales exceeding one million copies....
, restriction
Restriction
Restriction may refer to:* Restriction , an aspect of a mathematical function* Restrictions , an album by Cactus* Restriction enzyme, a type of enzyme that cleaves genetic material...
of transaction
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
s, and trading surveillance
Surveillance
Surveillance is the monitoring of the behavior, activities, or other changing information, usually of people. It is sometimes done in a surreptitious manner...
.
Popularization
The term was popularized in the United States following the stock marketStock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
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 offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
s. 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.KPMG
KPMG is one of the largest professional services networks in the world and one of the Big Four auditors, along with Deloitte, Ernst & Young and PwC. Its global headquarters is located in Amstelveen, Netherlands....
v. Superior Court 200 Cal.App.3d 272, 293–294, 245 Cal.Rptr. 873, 887–888 (1988), Presiding Justice Low wrote:
Other alternative phrases include screen
Screen
- Separation or partitioning :* Window screen, a wire mesh that covers a window opening* Fire screen, a device to put in front of a fireplace* Windbreak of trees or shrubs* Windshield , protects the driver of a vehicle...
(screening
Screening
One meaning of screening is the investigation of a great number of something looking for those with a particular problem or feature....
), firewall, cone of silence
Cone of Silence
The Cone of Silence is one of many recurring joke devices from Get Smart, an American comedy television series of the 1960s about an inept spy....
, and ethical wall. Screen or the verb to screen is the preferred term under the American Bar Association
American Bar Association
The American Bar Association , founded August 21, 1878, is a voluntary bar association of lawyers and law students, which is not specific to any jurisdiction in the United States. The ABA's most important stated activities are the setting of academic standards for law schools, and the formulation...
(ABA) Model Rules of Professional Conduct, a code of legal ethics
Legal ethics
Legal ethics encompasses an ethical code governing the conduct of persons engaged in the practice of law and persons more generally in the legal sector.-In the United States:...
that has been highly influential throughout the jurisdictions of the United States.
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.In spite of Chinese walls, these conflicts of interest arose during the heyday of the "dot-com
.com
The domain name com is a generic top-level domain in the Domain Name System of the Internet. Its name is derived from commercial, indicating its original intended purpose for domains registered by commercial organizations...
" era, when research analysts published dishonest positive analysis on companies in which they, or related parties, owned shares (see Global Settlement
Global settlement
The Global Settlement was an enforcement agreement reached on April 28, 2003 between the SEC, NASD, NYSE, and ten of the United States's largest investment firms to address issues of conflict of interest within their businesses-Settlement Decision:...
). The U.S. government has since passed laws strengthening the Chinese wall concept (e.g. Sarbanes-Oxley Act
Sarbanes-Oxley Act
The Sarbanes–Oxley Act of 2002 , also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which...
) 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.
Journalism
The term is also used in journalismJournalism
Journalism is the practice of investigation and reporting of events, issues and trends to a broad audience in a timely fashion. Though there are many variations of journalism, the ideal is to inform the intended audience. Along with covering organizations and institutions such as government and...
to describe the separation between the editorial and advertising
Advertising
Advertising is a form of communication used to persuade an audience to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive consumer behavior with respect to a commercial offering, although political and ideological advertising is also common...
arms of a media firm.
The Chinese wall is regarded as breached for advertorial
Advertorial
An advertorial is an advertisement in the form of an editorial. The term "advertorial" is a portmanteau of "advertisement" and "editorial." Merriam-Webster dates the origin of the word to 1946....
projects.
Law
Chinese Walls are used in law firmLaw firm
A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service rendered by a law firm is to advise clients about their legal rights and responsibilities, and to represent clients in civil or criminal cases, business transactions, and other...
s 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
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, 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.
Computer science
In computer scienceComputer science
Computer science or computing science is the study of the theoretical foundations of information and computation and of practical techniques for their implementation and application in computer systems...
, there are two common areas of usage: reverse engineering
Reverse engineering
Reverse engineering is the process of discovering the technological principles of a device, object, or system through analysis of its structure, function, and operation...
and computer security
Computer security
Computer security is a branch of computer technology known as information security as applied to computers and networks. The objective of computer security includes protection of information and property from theft, corruption, or natural disaster, while allowing the information and property to...
.
Reverse engineering
Chinese wall refers to a reverse engineeringReverse engineering
Reverse engineering is the process of discovering the technological principles of a device, object, or system through analysis of its structure, function, and operation...
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
Clean room design
Clean room design is the method of copying a design by reverse engineering and then recreating it without infringing any of the copyrights and trade secrets associated with the original design. Clean room design is useful as a defense against copyright and trade secret infringement because it...
.
Computer security
The Chinese Wall Model (also Brewer and Nash Model) is a security modelComputer security model
A computer security model is a scheme for specifying and enforcing security policies.A security model may be founded upon a formal model of access rights, a model of computation, a model of distributed computing, or no particular theoretical grounding at all....
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
Data privacy
Information privacy, or data privacy is the relationship between collection and dissemination of data, technology, the public expectation of privacy, and the legal and political issues surrounding them....
and integrity
Data integrity
Data Integrity in its broadest meaning refers to the trustworthiness of system resources over their entire life cycle. In more analytic terms, it is "the representational faithfulness of information to the true state of the object that the information represents, where representational faithfulness...
for data.
See also
- Glass–Steagall Act
- Brewer and Nash modelBrewer and Nash modelThe Brewer and Nash model was constructed to provide information security access controls that can change dynamically. This security model, also known as the Chinese wall model, was designed to provide controls that mitigate conflict of interest in commercial organizations, and is built upon an...
- Great Firewall of China
- Great Wall of ChinaGreat Wall of ChinaThe Great Wall of China is a series of stone and earthen fortifications in northern China, built originally to protect the northern borders of the Chinese Empire against intrusions by various nomadic groups...
, which predates these terms and usage.