What Is Disclosure? How It Works and Laws on Transparency (2024)

What Is Disclosure?

Disclosure refers to the timely release of information useful to an audience. In investing, disclosure is often abouta company, and the information being disclosed may influence an investor's decision. For example, a disclosure may reveal both positive and negative news, data, and operational details that impact its business.

Understanding Disclosure

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 laws were responses to the stock market crash of 1929 and the Great Depression that followed.

The public and 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 Actof 2002 extended public-company disclosurerequirements and government oversight of them. As mandated by the SEC, disclosures include thoserelatedto a company's financial condition, operating results,and management compensation.

Insider Information

The SEC requires specific disclosuresbecause the selective release of information places individual shareholders at a disadvantage. For example, insiderscanuse material nonpublic information for personal gain at the expense of the general investing public. Clearly outlined disclosure requirements ensure companies adequately disseminateinformationso that all investors areon an even playing field.

Companies are not the only entities subject to strict disclosure regulations. 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 personally own.

SEC-Required Disclosure Documents

The SEC requires all publicly-traded companies to prepare and issue two disclosure-related annual reports, one for the SEC itself and one for the company's shareholders. These reports are filed as documents called 10-Ks and must be updated by the company as events change substantially.

Any company seeking to go public must disclose information as part of a two-part registration that includes a prospectus and a second document that contains other material information. That information includes the company's own strengths, weaknesses, opportunities, and threats (SWOT) analysis of the competitive environment it operates within.

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 investments they own and investments owned by their family members.

Types of Financial Disclosure

There are several main types of financial disclosure:

• Annual Reports: Annual reports provide a comprehensive overview of a company’s financial performance and activities over the past year. They typically include audited financial statements, a management discussion and analysis, and information about the company's operations, strategy, and corporate governance. These are filed with the SEC using Form 10-K.
• Quarterly Reports: Quarterly reports, or Form 10-Q in the U.S., offer interim updates on a company’s financial condition and results of operations for each fiscal quarter. These reports are less detailed than annual reports but still provide information including financial statements, management's discussion of financial performance, and updates on significant events.
• Earnings Releases: Earnings releases are periodic announcements made by companies to report their financial performance for a specific period, usually every quarter. These releases highlight key financial metrics such as revenue, earnings per share, and profit margins, often accompanied by brief commentary from management.
• Other Regulatory Filings: Regulatory filings are required documents submitted to regulatory authorities such as the SEC. in the U.S., to comply with legal and reporting requirements. Key examples include the forms mentioned above (Form 10-K or Form 10-Q), though there are many other different types of forms. For example, companies must disclose when additional shares have been acquired by key internal stakeholders.

Real-World Example of Disclosure

In Microsoft's Form 10-K for the fiscal period ending June 30, 2023, the word "disclosure" appears 33 times. Here are some examples of what the company disclosed in its annual report.

The company identified potential risks associated with its operations. For example, the company included the following paragraph in its annual report:

Disclosure and misuse of personal data could result in liability and harm our reputation. As we continue to grow the number, breadth, and scale of our cloud-based offerings, we store and process increasingly large amounts of personal data of our customers and users. The continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to information security. Despite our efforts to improve the security controls across our business groups and geographies, it is possible our security controls over personal data, our training of employees and third parties on data security, and other practices we follow may not prevent the improper disclosure or misuse of customer or user data we or our vendors store and manage.

As part of SEC filing requirements, Microsoft has a specific section (Item 4) related to mine safety disclosures. The company stated this disclosure section was not applicable to them.

Microsoft did have a number of quantitative and qualitative disclosures about market risk, as do many companies. For example, here are four specific risks the company stated:

1. Foreign Currencies: Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency positions, including hedges. Principal currency exposures include the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.
2. Interest Rate: Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of the fixed-income portfolio to achieve economic returns that correlate to certain global fixed-income indices.
3. Credit: Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We manage credit exposures relative to broad-based indices to facilitate portfolio diversification.
4. Equity: Securities held in our equity investments portfolio are subject to price risk.

The Bottom Line

Disclosure involves providing detailed and transparent information about an organization’s performance and position. It is often required to ensure transparency, enable investors and stakeholders to make informed decisions, and maintain trust in financial markets.