Chinese wall
From Wikipedia, the free 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 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.
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[edit] Potential phrase origins
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 originates from a reference to Chinese standing screens which allow for the temporary installation of a wall in a room lacking the permanent architectural feature. The 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.
[edit] Objection to use of the phrase
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:
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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. |
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Other alternative phrases include "firewall" and "cone of silence."
[edit] Finance
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 heyday 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.
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 chinese walls are often used.
[edit] Journalism
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]
The Chinese wall is regarded as breached for advertorial projects.
[edit] 'Monetizing' controversy
In the fall of 2007, the daily newspaper in Memphis, Tennessee, The Commercial Appeal, touched off a controversial policy that would have linked specific stories and specific advertisers. "No longer are there thick, impenetrable walls between the newsroom, advertising, and circulation departments," said a memo circulated throughout the newspaper. "Today, we are in it together in this new world of newspaper survival." The proposal was greeted by such outrage among media analysts that the authors of the so-called 'monetization memo' quietly withdrew the effort.[1]
[edit] 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. 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]
[edit] Computer science
In computer science, there are two common areas of usage: reverse engineering and computer security.
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.
The Chinese Wall 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 Brewer and Nash model.
[edit] References
- ^ Barnes, Lindsay. "News for sale? Former C-Ville publisher sparks media debate", The Hook (newspaper), 2007-11-08. Retrieved on 2008-02-27.