What is a 'Chinese Wall'
Chinese wall refers to an ethical barrier between different divisions of a financial or other institution to avoid conflicts of interest. It is said to exist, for example, between the corporate-advisory area and the brokering department of a financial services firm 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, or allow staff to take advantage of facts not yet known to the general public.
BREAKING DOWN 'Chinese Wall'Maintaining client confidentiality is crucial to any firm but is particularly crucial for large multiservice businesses. When firms are providing a wide range of services, clients must be able to trust that information about themselves will not be exploited for the benefit of other clients with different interests, ergo trust in Chinese walls. However, some Wall Street scandals in recent years have made some people doubt the effectiveness of Chinese walls, as well-placed executives of respectable firms have traded illegally on inside information for their own benefit.
Etymology of the Chinese Wall in Finance
Presumably, the phrase was derived from the Great Wall of China, an ancient structure erected to keep the country safe from enemies. However, the phrase first entered the U.S. financial scene after the stock market crash of 1929. At that point, regulators began talking about erecting Chinese walls between brokers and investment bankers working at the same firm; eventually, legislation was created to regulate these entities. The ability to erect a Chinese wall between two divisions of the same company prevented the government from forcing investment banks and brokerages to split up and become separate entities.
Objections to the Phrase "Chinese Wall"
Some people view the phrase "Chinese wall" to be ethnically insensitive or racist. In particular, in 1988, in his concurring opinion in Peat, Marwick, Mitchell and Company vs. the Superior Court, Presiding Justice Harry W. Low wrote extensively about the offensiveness of the phrase. He objected to both parties of the trial using the phrase, and he offered the substitution of "screen." In addition to writing about the inherent racism of the phrase, he pointed out its metaphoric inaccuracy. He wrote that while the phrase refers to a two-way hermetic seal to prevent communication between two parties, the actual wall of China acts as a one-way seal to keep outsiders out.
Other Uses of the Phrase "Chinese Wall"
The phrase "Chinese wall" does not only appear when talking about financial firms. Newspapers, traditionally, also embrace the concept of a Chinese wall. In this context, it refers to the division between marketing staff and journalists, and exists for the purpose of ensuring that journalists are not swayed by the demands of the paper's advertisers.