What Is a Disclosure? Explained in Plain English
Disclosure is the process of making facts or information known to the public. Proper disclosure by corporations is the act of making its customers, investors, and any people involved in doing business with the company aware of pertinent information.
Disclosures are at the center of the public's crisis of confidence when it comes to the corporate world. They should be viewed as a very important and informative part of doing business with or investing in a company. This article will define disclosure and show why it's important as it relates to companies and investors.
- Disclosure is the process of making facts or information known to the public.
- Proper disclosure by corporations is the act of making its customers, investors, and analysts aware of pertinent information.
- Companies often place disclosures that protect them in case their financial forecasts are wrong due to changing economic conditions.
- Corporate disclosures also state that investors speak with a financial advisor before investing in the stock since it might not be right for them.
How Disclosures Work
In the investing world, corporations issue disclosures to provide investors and investment analysts with information that could influence an investor's decision whether 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 also disclose the nature of the relationship between the equity analysts, their employer, such as the investment firm, and the company that is the subject of the research report–called the subject company. It also provides critical facts that investors should be aware of, such as warning-like statements.
The Securities and Exchange Commission (SEC) requires that all research reports contain a disclosure statement. If you are reading a research report that does not have a disclosure statement, you should disregard it, as it can not be trusted.
Why Disclosures Are Important
The disclosure is as important to a research report as footnotes are to a corporate financial report. Footnotes are used by corporations to provide investors with details of specific financial line items within the company's financial statements.
Disclosures appear at the end of a research report and usually in very small print, like footnotes to a 10-K, which is a company's annual financial report. It may take a magnifying glass and a strong cup of coffee, but when reading a disclosure, investors should be able to determine who "paid" for the research report and the degree of objectivity that may, or may not, be present.
Disclosures that are written clearly and succinctly help investors to better trust the data and findings being shared in a research report.
Disclosures in Plain English
Unfortunately, disclosure statements are quite often written by lawyers who are more concerned with protecting the brokerage firm than providing easy-to-read information for investors. Lawyers use legal boilerplate clauses that make disclosures verbose and hard to read—hence the need for the strong coffee. Disclosures are often published in small type because they tend to be lengthy.
Below are some of the key points covered, or stated, in most disclaimers:
"This report contains forward-looking statements... actual results may differ from our forecasts."
In plain English, "This is our best guess, but we may be wrong." Companies and investment analysts often forecast revenue, sales, and business development. However, things can change, such as economic conditions could deteriorate. Anytime a company or analyst makes an oral or written statement about the company's future financial performance, it'll typically 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."
In other words, we may assume that corporate financial statements contain true information about a company's operations, but no analyst can audit a company's books to verify the truth of that assumption. That is the job of the accountants.
"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."
Equity analysts can't provide investment advice suggesting that investors buy a company's stock. Companies will also use this disclosure. Both analysts and company executives don't know the specific financial situation of investors, such as whether they're a retiree or a millennial.
A retiree, for example, might be better off investing bonds or safe investments. There are many factors that go into an investment decision of whether to buy a stock besides the financial performance of the company. Economic conditions, the investor's risk tolerance, and asset allocation can all impact the decision.
As a result, companies and investment firms often put 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."
This disclosure is very similar to the previous one and probably is the best bit of advice for a disclaimer. In other words, investors should consider all possible scenarios, including their financial situation and seek the help of a financial adviser in determining whether this stock is good for them.
Nature of Relationship
Investors should look for any conflicts of interest in the disclosure statements by looking for answers to these questions.
- What is the nature of the relationship between the subject company and the brokerage firm?
- Does the firm make a market in the stock and have they done investment banking for the subject company?
Brokerage firms do not produce research reports for free. Historically, income generated from trading, or investment banking, has funded research departments.
- Do the analysts and other members of the firm trade or own shares in the subject company?
It's not necessarily bad that an analyst owns a security that is being touted by the investment firm. However, it's important to disclose this information since stock ownership could impact the analyst's opinion of whether someone should buy the stock.