Chinese Wall

What a Chinese Wall is, why investment banks use in them, and how they work.

What is a Chinese Wall?

In finance, a Chinese Wall (or a Wall of China) is a virtual information barrier erected between those who have material non-public information and those who don’t to prevent conflicts of interest.

Below is an example of how a bank uses a Chinese Wall policy to comply with securities regulation.

 

Chinese Wall - Information Barrier

 

Material Non-Public Information

Investment bankers in possession of material, non-public information concerning a publicly traded company are strictly prohibited from discussing any such information with individuals who do not have a need to know such information for the purpose of servicing the client that provided such information to our bank.

A bank’s information barriers are been designed to properly control the flow of confidential information from one part of the bank to another or from one bank to any other business unit within the bank.

Generally, only those bank employees who are directly involved in servicing the client, or who are necessary participants in the senior management and due diligence processes of an investment banking transaction, may be brought over the wall.

 

Bringing Employees Over the Chinese Wall

Under some circumstances, investment bankers may be permitted to disclose material, nonpublic information to employees in the Credit Capital Markets, Commercial Banking, Equity Research and Risk Management departments for valid business purposes in connection with a particular investment banking transaction. However, this can occur only in limited circumstances and only in consultation with Compliance and, in the case of sharing information with a research analyst, only with the prior approval of the Head of Research.

Depending upon the significance of the information and the context in which it will be used, Compliance may recommend restrictions on the normal activities of the recipient of such information. Particular restraint should always be exercised with respect to the transmission of information (such as long-term corporate projections) which is not likely to become public during the course of an investment banking assignment and which may inhibit the ability of the recipient from engaging in normal business activities (including personal trading) once the investment banking assignment is completed.

Finally, when investment bankers have been engaged in respect of an unannounced potential transaction, they should remind the client’s officers that they should not provide any confidential information to any bank employee (including, in particular, research analysts and employees in Institutional Equities Sales and Trading) who has not been brought over the wall with respect to the transaction.

 

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Employees who are Above the Chinese Wall

Certain persons (such as senior members of our bank’s management, Internal Audit, Corporate Security, Legal, Compliance and Risk Management) will typically be “above the wall”. Persons who are above the wall may have access to material non-public information on both sides of the information barriers.

The usual procedural safeguards of an information barrier, also known as a “Chinese Wall”, do not restrict access to such information and the recipient must be particularly careful to avoid improper use or disclosure of non-public information, particularly to the employees in the Institutional Equities and Research departments.

In virtually all cases, persons who are “above the wall” are precluded from having any involvement in advising the client in connection with the particular transaction. However, after consultation with Compliance, persons who are above the wall may play a senior management and/or consulting role to more than one deal team if the bank’s conflicts are properly managed.

Chinese Walls are an important part of investment banking best practices and compliance.

 

Additional resources

Thank you for reading this guide to an important information barrier known as a Chinese Wall.  To keep learning and advancing your career, CFI has created many resources to help you on your way: