Chinese Wall or Emperor’s New Clothes? Regulating Conflicts of Interest of Securities Firms in the U.S. and the U.K.
This article has two principal theses. The first is that, while Chinese Walls of securities firms are undoubtedly useful in some instances in preventing the flow of confidential information, the evidence that they actually do this is insufficient to justify basing a legal defense on the existence of a wall in a particular firm. In fact, it is difficult to avoid the conclusion that at some firms the Chinese Wall is nothing but a convenient fiction aimed at avoiding liability for market abuses. The article’s second thesis is that the isolation of information within a department of a firm which is achieved by an effective Chinese Wall is inconsistent with the goals of full disclosure, self-regulation, and managerial responsibility that are fundamental to the regulatory systems governing the securities markets of both the U.S. and the U.K. This may be particularly true under the new British rules, where Chinese Walls are designed to isolate not merely non-public information concerning a firm’s investment banking clients, but also information concerning the firm’s internal operations, such as trading for its customers’ and its own account, or the work of its research department.