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 a research report, but often go relatively unnoticed. This article will define what a disclosure is and why it is important to investors.
What Is a Disclosure?
According to Webster's Dictionary, the definition of "disclose" is "to uncover or reveal." In research reports, a disclosure is a statement that reveals the nature of the relationship between the analysts, their employer and the company that is the subject of the research report (also known as the "subject company"). It also provides other warning-like statements that investors should be aware of.
The disclosure is as important to a research report as footnotes are to a corporate financial report. 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
Disclosures appear at the end of a research report and usually in very small print, like footnotes to a 10-K. A disclosure contains important information on the relationship between the analyst, the brokerage firm that employs him or her and the subject company. It may take a magnifying glass and a strong cup of coffee, but if you read it you should be able to determine who "paid" for the research report and the degree of objectivity that may, or may not, be present.
Disclosures in Plain English
The bad thing about disclosure statements is that they are quite often written by lawyers who are more concerned about protecting the brokerage firm than providing easy-to-read information. Lawyers use legal boilerplate that makes 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 long.
These 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.")
- "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.")
- 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/or 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/or other members of the firm trade or own shares in the subject company? (Is it bad that an analyst puts his money where his mouth is?)
- "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." (Then, why are you publishing 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 is probably the best bit of advice in the disclaimer.)
The Bottom Line
More disclosure is always a good thing. This best serves investors when they are written in the "KISS" (keep it simple, stupid) style. Disclosures that are written clearly and succinctly help investors to better trust the data and findings being shared in a research report.