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Chinese wall

Chinese wall is a business term describing an information barrier within an organization that was erected in order 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.[1]

Contents

  • Etymology 1
    • Racism 1.1
  • Usage in specific industries 2
    • Finance 2.1
    • Journalism 2.2
    • Law 2.3
    • Computer science 2.4
      • Reverse engineering 2.4.1
      • Computer security 2.4.2
  • See also 3
  • References 4

Etymology

The origin of the phrase is the Great Wall of China.[2] 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.[3] 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.[4][5]

Racism

In Peat, Marwick, Mitchell & Co. v. Superior Court (1988), Presiding Justice Harry W. Low, a Chinese American,[6] 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".[5][7]

Alternative phrases include "screen",[8] firewall, "cone of silence", and "ethical wall". "Screen" or the verb "to screen" is the preferred term of the American Bar AssociationModel Rules of Professional Conduct.[9][10][11][12]

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.[1] 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.[13][14]

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, 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.[15] 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."[16] 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, 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.[17][18] See also clean room design.

Computer security

The "Chinese Wall Model" or the "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. ^ a b Frier, Sarah (9 October 2014). "Goldman Sachs Turns to Digital Surveillance to Catch Rogue Bankers". Bloomberg Businessweek. 
  2. ^  
  3. ^ Investopedia. "The Chinese Wall Protects Against Conflicts Of Interest". Retrieved 13 February 2012. 
  4. ^ "The Chinese Wall Defense to Law-Firm Disqualification" (1980) 128 University of Pennsylvania Law Review. 677
  5. ^ a b Peat, Marwick, Mitchell & Co. v. Superior Court, 200 Cal.App.3d 272, 293–294, 245 Cal.Rptr. 873, 887–888 (1988)
  6. ^ "Hon. Harry W. Low (Ret.)".  
  7. ^ David Hricik (June 8, 2005). "Chinese Walls: Racist?". Legal Ethics Forum. 
  8. ^ See Martin v. MacDonald Estate (Gray) [1991] 1 WWR 705 at 715, as per Sopinka J.
  9. ^ "Model Rules of Professional Conduct", 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.
  10. ^ http://www.halt.org/reform_projects/lawyer_accountability/discipline_system/rules_of_conduct/
  11. ^ http://www.aallnet.org/products/pub_sp0809/pub_sp0809_Legal.pdf
  12. ^ Sharon D. Nelson; David K. Isom; John W. Simek (2006). Information Security for Lawyers and Law Firms. American Bar Association. pp. 25–.  
  13. ^ "Chinese Wall Definition", Investopedia.
  14. ^ Luyendijk, Joris (3 February 2012), "Equity finance banker: 'Don't underestimate the Japanese banks",  
  15. ^ Solicitors Regulation Authority. "Rule 3: Conflict of interests". SRA guidelines rule 3. 
  16. ^ http://www.americanbar.org/newsletter/publications/gp_solo_magazine_home/gp_solo_magazine_index/solo_lawyer_conflicts_ethics_client.html
  17. ^ Schwartz, Mathew (2001-11-12). "Reverse-Engineering". Computerworld. Retrieved 2013-06-23. To protect against charges of having simply (and illegally) copied IBM's BIOS, Phoenix reverse-engineered it using what's called a "clean room," or "Chinese wall," approach. First, a team of engineers studied the IBM BIOS—about 8KB of code—and described everything it did as completely as possible without using or referencing any actual code. Then Phoenix brought in a second team of programmers who had no prior knowledge of the IBM BIOS and had never seen its code. Working only from the first team's functional specifications, the second team wrote a new BIOS that operated as specified. 
  18. ^ Hogle, Sean (2008-10-23). "Clean Room Defeats Software Infringement Claim in U.S. Federal Court". Retrieved 2013-05-23. [...] dirty room reverse engineering should be done in conjunction with clean room development by using two physically and electronically isolated teams where one team does dirty room reverse engineering and the other does clean room development. If a dirty room team exists, the clean room engineers can write a description of the portion of the specification that needs elaboration or clarification. The dirty room engineers then use that request to create additional functional specifications or tests. 
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