Chinese Wall - Finance

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 term "already over the wall" is a phrase used by equity research personnel to refer to rank-and-file personnel who operate without the Chinese Wall barrier 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 has somehow obtained 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 (see Global Settlement), 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 concept (e.g. Sarbanes-Oxley Act, Title V) 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.