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Disclosure is when a company or corporation informs its customers, investors, and analysts involved in doing business with the company, of pertinent information. Federal regulations require publicly traded companies to disclose relevant financial information to shareholders.
Companies often include disclosure statements in reports that protect them if their financial forecasts change due to economic conditions.
Key Takeaways
- Disclosure is the process of making facts or information known to the public.
- Proper disclosure by corporations makes customers, investors, and analysts aware of pertinent information.
- Companies often place disclosures that protect them if their financial forecasts change with economic conditions.
What Disclosure Means for Investors
Corporations issue disclosures to provide investors and investment analysts with information that could influence an investor’s decision to buy a company’s stock or bonds. The disclosure statement can reveal negative or positive news and financial information about the company.
Investment research reports disclose the nature of the relationship between equity analysts, their employer, such as the investment firm, and the company that is the subject of the research report–called the subject company. The Securities and Exchange Commission (SEC) requires that all research reports contain a disclosure statement.
Disclosures appear at the end of a research report and usually in small print, like footnotes to a 10-K, a company’s annual financial report. The disclosure is as important to a research report as footnotes are to a corporate financial report. Companies use footnotes to give investors details of specific financial line items within the company’s financial statements.
When choosing a brokerage firm to purchase a company’s shares, investors should look for any conflicts of interest in disclosure statements to determine the nature of the relationship between the company and the brokerage firm.
Examples of Disclosure Statements
Disclosure statements are often written by lawyers who use legal boilerplate clauses that commonly make disclosures verbose and lengthy. Examples of disclosure statements that may be found in a financial report include:
“This report contains forward-looking statements… actual results may differ from our forecasts.”
Companies and investment analysts often forecast revenue, sales, and business development. However, economic conditions could deteriorate. Anytime a company or analyst makes an oral or written statement about future financial performance, it may include a forward-looking statement disclosure.
“This report is based on information from resources that we believe to be correct, but we haven’t checked it.”
Corporate financial statements should contain true information about a company’s operations. Accountants can audit a company’s books to verify the assumptions.
“This report is being provided for informational purposes only, and on the condition that it will not form a primary basis for any investment decision.”
An individual’s financial situation, risk tolerance, and asset allocation impact their investing decisions. Companies and investment firms may include this disclosure to protect them from appearing that they’re suggesting that an investor buy the stock solely on the information in the report.
“Investors should make their own determination of whether or not to buy or sell this stock-based upon their specific investment goals, and in consultation with their financial advisor.”
Investors should consider all possible scenarios, including their financial situation, and seek the help from a financial advisor to determine whether this company’s stock is good for them.
Where Are Disclosure Statements Found?
A public company’s annual (10-K) or quarterly reports (10-Q) include disclosure statements. A disclosure statement is common in an Individual Retirement Account (IRA) to explain financial transactions. Loans usually include a disclosure statement to outline terms and conditions of a loan, including its interest rate.
What Are SEC Requirements for Disclosures?
The SEC requires disclosures so that all shareholders receive the same information. Following the Great Depression, the Securities Act of 1933 and the Securities Exchange Act of 1934 mandated corporate transparency. In 2002, the Sarbanes-Oxley Act extended public-company disclosure requirements and government oversight.
How Do Disclosure Requirements Prevent Insider Trading?
If only company insiders have pertinent information, they may use the data for personal gain at the expense of the investing public. Disclosure requirements ensure companies adequately disseminate information.
The Bottom Line
Proper disclosure provides individuals with important corporate information, which they use to make better investment decisions. Statements are included in annual or quarterly reports and aim to protect companies if their financial forecasts change with economic conditions. The SEC requires transparency in the reports of publicly traded companies.
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