Chinese Wall

Ethical Wall (formerly “Chinese wall”) — Definition and Purpose

An ethical wall is an internal information barrier within an organization that prevents the flow of sensitive or non-public information between teams or departments. Its purpose is to avoid conflicts of interest, protect client confidentiality, and reduce the risk of insider trading or other unethical conduct.

Why organizations use ethical walls

• Prevent conflicts of interest when different parts of a firm have competing roles (for example, advisory vs. trading).
• Protect confidential, material non-public information (e.g., merger talks, IPO details).
• Demonstrate compliance with laws and regulatory expectations.
• Preserve client trust and reduce legal and reputational risk.

How ethical walls work (practical measures)

Organizations implement ethical walls through a combination of policies, controls and monitoring:

• Access controls: Restrict electronic and physical access to files, systems, and meeting spaces on a need‑to‑know basis.
• Information segregation: Keep sensitive matters documented and stored separately with limited user permissions.
• Organizational separation: Assign different teams or reporting lines to create distance between conflicting activities.
• Communication rules: Prohibit informal or formal information sharing between specified groups; require advance approval for any cross-team contact.
• Notifications and disclosures: Alert senior management and compliance about potential conflicts and the parties involved.
• Training and attestations: Educate staff on restrictions and require periodic confirmations of compliance.
• Monitoring and audit trails: Log access to sensitive information and review for breaches.
• Legal and compliance oversight: Involve compliance or legal counsel to design, approve and enforce the wall, and to document its scope and duration.

Ethical walls can be temporary (e.g., during a specific engagement) or permanent (e.g., ongoing separation between investment banking and research).

Examples

• Finance: An investment bank advising a company on an acquisition must prevent its advisory team’s confidential takeover plans from reaching the bank’s traders or client advisors who might trade on that information.
• Legal: A law firm representing two parties in related matters may isolate teams, restrict file access, and prohibit communication between the teams to avoid conflicts of interest.

Regulatory context

• Gramm‑Leach‑Bliley Act (GLBA, 1999): By allowing broader combinations of banking, securities and insurance activities, GLBA increased the need for robust internal controls to protect consumer data and prevent conflicts that can arise within diversified financial firms.
• Sarbanes‑Oxley Act (SOX, 2002): Strengthened corporate governance and internal controls, increasing scrutiny on safeguards that help prevent insider trading and information misuse.
• SEC and other regulators: Enforcement actions and fines may follow breaches of information controls where insider trading, market manipulation or confidentiality violations occur.

Why the term changed

The term “Chinese wall” originated as a metaphor drawn from the Great Wall of China, but it has been criticized as culturally insensitive and misleading. Most organizations and regulators now prefer “ethical wall” or “information barrier” to avoid offensive language and better reflect the concept’s purpose.

Limitations and risks

• Not foolproof: Human error, informal communications and deliberate circumvention can breach walls.
• Implementation gaps: Weak access controls, unclear policies, or inadequate oversight can render a wall ineffective.
• Ongoing maintenance: Effective walls require active supervision, audits and periodic updates to reflect organizational changes.

Key takeaways

• An ethical wall is an internal barrier that prevents the sharing of sensitive information to manage conflicts of interest and protect confidentiality.
• Implementation relies on access controls, organizational separation, communication rules, training, monitoring and legal oversight.
• Regulatory changes and enforcement (GLBA, SOX, SEC) make robust ethical walls an essential part of compliance in finance and other sectors.
• The preferred terminology is now “ethical wall” or “information barrier” to avoid cultural insensitivity and better describe the control.