What Is Disclosure?
In the financial world, disclosure refers to the act of releasing all relevant information on a company that may influence an investment decision—making public both positive and negative news, data, and other details about its operations, or that impact its operations, in a timely fashion. Similar to disclosure in the law, the concept is that, in the interest of fairness, all parties should have equal access to the same set of facts.
The Securities and Exchange Commission (SEC) outlines and enforces disclosure requirements for firms incorporated within the United States. Companies must follow the SEC's regulations to be listed on major U.S. stock exchanges.
- Disclosure is the act of releasing all relevant company information that may influence an investment decision.
- Disclosure items, as outlined by the SEC, include those related to a company's financial condition, operating results and management compensation.
- To go public and be listed on major U.S. stock exchanges, companies must adhere to the SEC's regulations regarding disclosure.
The Basics of Disclosure
Although regulation of business had existed before, federal government-mandated disclosure came into being in the U.S. with the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. Both acts were reactions to the Stock Market Crash of 1929 and the ensuing Great Depression: The public and the politicians alike blamed a lack of transparency in corporate operations for intensifying—if not outright causing—the financial crisis. Since then, additional legislation, such as the Sarbanes-Oxley Act of 2002, has extended public-company disclosure requirements.
Disclosure items, as outlined by the SEC, include those related to a company's financial condition, operating results and management compensation. The SEC requires specific disclosures because the selective release of information places investors and company stakeholders at a disadvantage. For example, insiders can use material nonpublic information for personal gain at the expense of the general investing public. Clearly outlined disclosure requirements ensure companies adequately disseminate information so that all investors are on an even playing field.
Companies are not the only entities subject to strict disclosure regulations. For example, brokerage firms, investment managers, and analysts must also disclose any information that might influence and affect investors. To limit conflict-of-interest issues, analysts and money managers must disclose any equities they own.
SEC-Required Disclosure Documents
The SEC requires all publicly traded companies prepare and issue two disclosure-related annual reports: one for the SEC itself and one for the company's shareholders. These reports come in the form of 10-Ks.
Any company seeking to go public must disclose information as part of a two-part registration composed of a prospectus and a second document that contains any other material information such as company-supplied strengths, weaknesses, opportunities, and threats (SWOT) analysis of the competitive environment. A SWOT analysis identifies an organization's strengths, weaknesses, external opportunities and threats using the market as a benchmark.
The SEC imposes stricter disclosure requirements for firms in the securities industry. For example, company officers of investment banks must make personal disclosures regarding the securities they own and securities owned by family members.
Real World Example of Disclosure
Take a press release issued by Target Corporation (TGT) in March 2018, announcing its Fourth Quarter and Full-Year 2017 Earnings report. In it, the company highlighted its after-tax return on invested capital (ROIC) for 2017 as being up from the previous year, from 15% to 15.9%.
However, Target admits, using ROIC does not adhere to the Generally Accepted Accounting Principles (GAAP) that companies must follow when compiling financial statements. To clear up any confusion for shareholders, Target also added a note of disclosure to its release and earnings report, concerning the figures, denoting the limits of non-GAAP financial measures (like ROIC), and providing a "Reconciliation of Non-GAAP Financial Measures" section and a schedule of its calculations "to provide additional transparency." (For related reading, see "Is a Private Company Required to Disclose Financial Information to the Public?")