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The Chinese Wall

The financial services business is a complex enterprise with many moving sections.

Finance companies are engaging in overlapping activities that present opportunities for conflicts of interest.

To avoid such conflicts, regulators require what is known as a “Chinese Wall.”

Chinese Wall

Like the Great Wall of China, which was designed to separate two worlds, the Chinese wall in the securities industry serves a similar purpose.

For the financial services industry, the wall is designed to separate underwriters and analysts.

It is supposed to eliminate the transfer of information between analyst and underwriters, which have separate roles, and are operating independently.

Underwriters evaluate companies in order to get information of a firm’s financial health.

The information is used to i.e. determine creditworthiness when a company seeks a loan, and to determine value when a company puts itself up for sale.

The insight and data that underwriters gain from evaluating companies may include many details, which could not be obtained without direct access to information.

On the other hand, analysts also evaluate companies in order to get information that will help them make investment decisions.

Such decisions influence portfolio managers and investors when buying securities issued by the firms that have been analyzed.

Analysts are banned from using “Inside Information,” which includes any non-public fact of a publicly traded company that could provide a financial advantage when used to buy or sell shares of the company's stock.

Because underwriters work on one side of the Chinese wall and analysts work on the other side, information gathered by the underwriters is not supposed to be shared with analysts.

Chinese Wall 2

To keep information transfer from happening, financial services firms such as banks, brokerage firms and etc have special policies.

The financial services industry has a long history of conflicts of interest.

Despite the best efforts of regulators, the Chinese Wall has proven ineffective at thwarting intentional information-sharing between various parts of financial services organizations.

Usually, greed wins as the motivation to make money entices employees and their employers to break the rules in pursuit of profits.

   

   
 
 
 
 
 

 

 
 
 
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