Chinese Wall
What Is the Definition of a Chinese Wall?
In the business sector, the phrase "Chinese wall" refers to a virtual barrier designed to prevent information from being shared across departments if it may lead to unethical or illegal business practices. Chinese walls are a term used in the United States by companies, brokerage firms, investment banks, and retail banks to describe circumstances where secrecy is required to avoid conflicts of interest.
Large financial organisations have employed Chinese wall rules to self-regulate their commercial practices by establishing ethical divisions across departments throughout the years. These attempts, however, have not always been successful. As a result, the Securities and Exchange Commission (SEC) has implemented rules that control how financial institutions communicate data. Companies that violate these restrictions face fines, penalties, and legal repercussions, according to the SEC.
TAKEAWAYS IMPORTANT
A Chinese wall is a business term for a virtual barrier created to prevent information from being shared across divisions inside a corporation.
The barrier is an ethical one, designed to prohibit the exchange of knowledge that might lead to ethical or legal infractions.
With the passage of the Gramm-Leach-Bliley Act of 1999 (GLBA), which abolished federal rules prohibiting companies from providing any combination of banking, investing, and insurance services, the need for such barriers expanded in the financial industry.
What Makes a Chinese Wall Work?
In investment banking, the practice of erecting a Chinese wall within a corporation is popular. Investment bankers typically have access to non-public, important information about publicly listed firms or companies that are about to become public through an initial public offering through their client ties (IPO). Investment bankers are in charge of creating information barriers that keep secret information out of one department of the bank and out of the hands of other business units.
After the passage of the Gramm-Leach-Bliley Act in 1999, the necessity for a Chinese wall in the banking industry became even more pressing (GLBA). Federal laws barring corporations from providing any combination of banking, investing, or insurance services were removed by the statute. The GLBA overturned prohibitions that had been in effect since the Great Depression on such combinations. The GLBA also paved the way for today's financial behemoths like Citigroup and JPMorgan Chase to emerge.
IMPORTANT :The phrase "Chinese wall" has recently been chastised for being culturally offensive. As an alternative, one judge recommended an "ethical wall."
Illustrations of Chinese Walls
A corporate investment branch of a financial services corporation may be operating on behalf of a public company pursuing a purchase of a competitor. The discussions are kept very private, not least because the knowledge may be used for unlawful insider trading. Yet, in another section of the same organisation, financial advisers may be actively recommending customers to purchase or sell shares in the firms involved. The Chinese wall is meant to keep investment advisers from finding out about the acquisition discussions.
The adoption of the Sarbanes-Oxley Act (SOX) in 2002 reinforced the necessity for a Chinese wall policy by requiring corporations to have better measures against insider trading.
Other professions use the notion of a Chinese wall. They might be short-term or long-term. If a law firm is representing both sides in a court battle, for example, a temporary barrier between the two legal teams may be erected to prevent actual or apparent collusion or prejudice.
Particular Points to Consider
The Great Wall of China, an impenetrable fortification built in ancient times to protect China from its foes, gave rise to the Chinese wall. Shortly after the stock market disaster of 1929, Congress began discussing the necessity to erect regulatory barriers between brokers and investment bankers, and the phrase was coined.
In recent years, the word has been criticised for being culturally inappropriate. In Peat, Marwick, Mitchell & Co. vs. the Superior Court, Justice Low, a judge, wrote extensively on the offensiveness of the word and its negative connotation toward Chinese culture and business practices in 1988.
In fact, the court pointed out that the metaphor isn't even applicable. The expression refers to a two-way seal designed to hinder communication between parties, whereas the Great Wall of China is a one-way barrier designed to keep intruders out. As an alternative, Justice Low proposed the phrase "ethical wall."
