I was interested to see the response from
Lisa Jamieson of MacBank (25/7, item 29) protesting, “… we stand behind
the effective operation of our Chinese Walls …”. So I went looking on MacBank’s website for
details of their Chinese Wall arrangements.
Unfortunately they are not published there, but the website does contain
many references to when they are used.
For instance, certain funds can trade in other Macquarie entities
outside of designated trading windows provided that Chinese Walls are in
place. Of course, that sort of
related-party trading could otherwise give rise to an apparent conflict of
But will any Chinese Wall really overcome
an apparent conflict of interest? It is
interesting to see how well accepted Chinese Walls are when the niceties of
dealings between city “chaps” are set aside and push comes to shove. The answers are well collected in a Supreme
Court judgment against a national law firm a few years ago (Newman v Phillips Fox  WASC 171). Here are some relevant extracts, drawn from
cases around the world:
Walls or information barriers of that kind have not
often found favour with the courts. …
Enforcement by the court will be extremely difficult
and it is not realistic to place reliance on such arrangements in relation to
people with opportunities for daily contact over long periods, as wordless
communication can take place inadvertently and without explicit expression, by
attitudes, facial expression or even by avoiding people one is accustomed to
see, even by people who sincerely intend to conform to control. …
When one has sensitive information in a firm or in any
other group of people, there is the element of seepage of that information
through casual chatter and discussion, the letting slip of some information which
is not thought to be relevant but may make the link in a chain of causation or
reasoning. [Experience has] demonstrated
that the maintenance of security on either side of Chinese walls in the context
of the city of London did ” … not always prove to be very easy”.
Parker LJ … doubted very much whether an impregnable
wall could ever be created and considered that it was only in very special
cases that any attempt should be made to do so.
Chinese walls … should be used only in exceptional circumstances where
there was an overriding and compelling need.
… it would only be in exceptional circumstances that a
court would accept the existence of a Chinese wall … as a sufficient
justification for continuing to act in circumstances in which there was a real
risk of disclosure.
… a Chinese wall, a device which generally had little
to offer in resolving conflict of interest situations …
… once a potential conflict of interest situation has
arisen … the protection thought to be given by a ‘Chinese wall’ will almost
always prove to be illusory.
In a case involving an international
accounting firm, the House of Lords referred to a Chinese wall as involving:
The physical separation of the various departments in
order to insulate them from each other – this often extends to such matters of
detail as dining arrangements;
an educational program, normally recurring, to
emphasise the importance of not improperly or inadvertently divulging
strict and carefully defined procedures for dealing with
a situation where it is felt that the walls should be crossed and the
maintaining of proper records where this occurs;
monitoring by compliance officers of the effectiveness
of the wall;
disciplinary sanctions where there has been a breach
of the wall.
These safeguards must also extend to clerks
and administrative staff.
There is enough on the MacBank website to
indicate that it does have a monitoring and compliance unit, so I am not
suggesting deficiencies there. But it
does raise the bigger question (in part championed by Stephen Mayne in his
recent board tilt) of whether investment banks, their funds and their staff
should be engaging in this sort of trading at all. Is it enough to say “we stand behind the
effective operation of our Chinese Walls”?
Or should they only be used “in exceptional circumstances where
there was an overriding and compelling need” as the courts have suggested?