What is disclosure?
In the financial world, disclosure refers to the act of disclosing all relevant information about a business that can influence an investment decision – making news, data and other positive and negative details about its operations, or that have an impact on its operations, in a timely fashion. Similar to disclosure in law, the concept is that, in the interests of fairness, all parties should have equal access to the same set of facts.
The Securities and Exchange Commission (SEC) defines and enforces disclosure requirements for companies incorporated in the United States. Companies must follow SEC regulations to be listed on major US exchanges.
Key points to remember
- Disclosure is the act of disclosing all relevant business information that may influence an investment decision.
- The disclosures, as defined by the SEC, include those related to the financial condition, results of operations and executive compensation of a business.
- To go public and be listed on major US exchanges, companies must comply with SEC disclosure regulations.
The basics of disclosure
Although business regulation has existed before, disclosure imposed by the federal government came into being in the United States with the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. The two laws were reactions the stock market crash of 1929 and the events that followed. Great Depression: The public and politicians have 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 the disclosure requirements for public companies.
The disclosures, as defined by the SEC, include those related to the financial condition, results of operations and executive compensation of a business. The SEC requires specific information because selective disclosure of information disadvantages investors and business stakeholders. For example, insiders may use material non-public information for personal gain to the detriment of the general investing public. Clearly defined disclosure requirements ensure that companies receive adequate information so that all investors are on an equal footing.
Businesses are not the only entities subject to strict disclosure regulations. For example, brokerage firms, investment managers and analysts should also disclose any information that may influence and affect investors. To limit conflict of interest issues, analysts and fund managers should disclose the stocks they own.
Disclosure documents required by the SEC
The SEC requires all publicly traded companies to prepare and publish two annual disclosure reports: one for the SEC itself and one for the shareholders of the company. These reports are in the form of 10-K.
Any company seeking to go public must disclose information within the framework of a two-part registration consisting of a prospectus and a second document which contains any other important information such as strengths, weaknesses, opportunities and threats (SWOT) provided by the company. competitive environment. A SWOT analysis identifies the strengths, weaknesses, external opportunities and threats of an organization using the market as a benchmark.
The SEC imposes more stringent disclosure requirements on companies in the securities industry. For example, corporate officers of investment banks must provide personal information about the securities they own and the securities held by family members.
Example of real-world disclosure
Take a press release issued by Target Corporation (TGT) in March 2020 announcing its report on fourth quarter and fiscal 2020 results. In this document, the company noted that its after-tax return on capital employed ( ROIC) for 2020 was up compared to the previous year, from 15% to 15.9%.
However, Target recognizes that the use of ROI does not comply with generally accepted accounting principles (GAAP) that companies must comply with when compiling financial statements. To clear up any confusion for shareholders, Target has also added a disclosure statement to its publication and results report regarding the numbers, indicating the limits of non-GAAP financial measures (such as ROI) and providing a “Reconciliation of non-GAAP financial statements”. Measures “section and schedule of its calculations” to provide additional transparency. “(For related reading, see” Is a private company required to disclose financial information to the public? “)