Information Barriers – Why they matter and what makes them difficult

March 15, 2024
Karthik Krishnan
5 min read

Have you ever considered the invisible barriers that exist within your organization? With so much data flowing in more places than ever before, it’s essential that businesses manage and control who has access to what. 

This is where information walls come in.

What are information walls?  

Information walls are virtual barriers that prevent information sharing between different departments or groups within an organization to avoid potential conflicts of interest. The goal is to keep firms in compliance with federal regulations and prevent any ethical or legal issues.  

Using proprietary information illegally – best exemplified by insider trading – can result in steep fines and substantial damage to the firm’s reputation and market presence. These fines can total millions of dollars, sometimes in the billions of dollars. The stakes are high to keep sensitive information protected, but at the same time, to allow the needed flexibility for companies to conduct ongoing business activities efficiently. 

However, information walls can also create challenges:

  • They can hinder collaboration: If different departments can’t share information with each other, it can be difficult to collaborate on projects.
  • They can be difficult to maintain: As organizations change and grow, information walls need to be constantly updated to reflect these changes.
  • They can be expensive to implement and enforce.

Where walls matter most 

Information walls are most often associated with the financial services sector. As an example, a financial services firm may rely on the information wall to separate the investment banking department from the trading desk. The motivation is to prevent sensitive information from leaking over to traders who could act upon it. If the firm is advising a client on a merger and acquisition deal (M&A), these discussions are highly confidential, because of the potential for insider trading on this information. Recently, charges were laid in four separate insider trading cases against ten individuals, including drug company employees, an investment firm Executive Director, and SPAC investors. 

In a similar situation, the investment banking department needs to be walled off from the research desk. If the firm is vying for business with a corporate client, research analysts may be pressured to provide a favorable rating for the company to help win the deal. In this case, investors would be buying the company’s stock believing that the analysts’ advice is unbiased, while the firm, their clients, and individuals aware of this situation could sell the very same securities on insider information for hefty but illegal gains.

Information walls are also intended to help avoid a potential conflict of interest in other categories of financial firms, e.g., hedge funds. As part of conducting ongoing business activities, a fund may come into possession of sensitive information related to companies in which they are considering investing or those that happen to be their advisory clients. As a result, the fund employees in possession of the insider information would need to be precluded from disclosing it or related ideas to other departments. In a real-world example, the SEC recently charged a hedge fund manager with insider trading.  

The concept of information walls exists in other professions. For example, if a legal firm is representing both sides in an ongoing legal case, a temporary wall may be placed between the two legal teams to prevent a possible conflict of interest.

Impact of US regulations

Information walls initially gained public attention when Congress reacting to the stock market crash of 1929 – partially attributed to trading on insider information – passed the 1933 Glass-Steagall Act (GSA). This legislature called for a separation of commercial and investment banking activities – in other words, splitting investment banks, brokerage firms, and retail banks. GSA demanded the separation between the investment banking and research departments while permitting companies to participate in both activities, creating the need for information walls. 

Information walls returned to public attention in the ’90s when Congress passed the Gramm-Leach-Bliley Act (GLBA) of 1999 in an attempt to modernize the financial industry. The legislature repealed much of the Glass-Steagall Act, permitting banks, insurance and financial services companies to act as combined entities. The law allowed the creation of financial giants, such as Citigroup, and created the need to erect robust information barriers between the departments. 

The need for information walls was strengthened in 2002 by the passage of the Sarbanes-Oxley Act (SOX), which mandated that companies enforce stricter safeguards against insider trading.

Overcoming the Challenges of Information Walls 

While information walls are critical for regulatory compliance and protecting sensitive data, they can also pose challenges like hindering collaboration and increasing operational costs. 

Here are some strategies to mitigate these challenges and effectively manage information walls within an organization: 

Clearly define the purpose of each information wall. Before implementing a wall, it’s essential to define what specific information needs protection and the rationale behind it. Is it confidential customer data? Insider trading prevention? Outlining the “why” facilitates better design and acceptance of the information wall. 

Only create information walls when absolutely necessary. Excessively restrictive information walls can stifle cross-functional collaboration and innovation. Carefully evaluate whether an information barrier is truly necessary and consider alternative solutions if possible.

Review information walls regularly to make sure they are still necessary. Business needs and regulatory landscapes change over time. Regular reviews ensure that information walls remain relevant. If a wall is no longer serving its intended purpose, it may be time to modify or remove it.

Use technology to automate the enforcement of information walls. Manually enforcing information walls can be time-consuming, prone to errors, and expensive. Technology solutions can streamline enforcement, ensuring that access controls are consistently applied and logged, reducing the administrative burden and increasing reliability.

Effective information walls are a must

In the era of rapidly moving and fast-changing business conditions, information walls need to be constructed and maintained to be compliant with the regulatory requirements and to avoid potential illegal or unethical consequences. At the same time, the walls need to allow organizations to conduct ongoing business activities without hindering them. 

Rapidly growing volume and variety of data combined with unprecedented ease of sharing it, bring new challenges to erecting robust and sustainable information walls. It is critical to address these formidable challenges, as the stakes of failure are high.

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