Companies that are privately owned are not required by law to disclose detailed financial and operating information. They have a wide latitude in deciding what types of information to make available to the public. They can shield information from public knowledge and determine for themselves who needs to know specific types of information.

Companies that are publicly owned, on the other hand, are subject to detailed disclosure laws about their financial condition, operating results, management compensation, and other areas of their business. The current system of mandatory corporate disclosure began in the 1930s with the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. These acts as well as subsequent legislation related to disclosure have been implemented by rules and regulations of the Securities and Exchange Commission (SEC).

Disclosure laws are designed to protect investors through the disclosure of business and financial information that could be considered relevant to making an investment decision. Since private companies do not raise money from the investing public, they are not subject to the same disclosure laws as public companies. Investors in private companies are considered to be sufficiently well informed about their investment decisions so as not to require the protection of disclosure laws.

Congress and the SEC balance a concern for investor safety with a concern for business's ability to raise capital. They recognize that disclosure laws should not be so burdensome on companies that they discourage capital formation through the offering of stock and other securities to the public. It is generally recognized that registration requirements for new securities issues and the ongoing reporting requirements for public companies are more burdensome on smaller businesses and stock issues than on big ones. Consequently Congress has over time raised the limit on the small issue exemption from $100,000 as it was in the original 1933 act to $300,000 in 1945, $500,000 in 1970, $1.5 million and then $2 million in 1978, and $5 million in 1982. That means that securities issues up to $5 million are not subject to the registration requirements of the SEC.

All of the SEC's disclosure requirements have statutory authority, and these rules and regulations, such as the small issue exemption, are subject to changes and amendments over time. Some changes are made as the result of new accounting rules adopted by the principal rule-making bodies of the accounting profession. In other cases changes in accounting rules follow changes in SEC guidelines. In any event SEC regulations have a direct impact on what are known as generally accepted accounting principles. The rule-making bodies of the accounting profession, most notably the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA), must rely on "acceptance" of their statements. While FASB and AICPA statements do not have the force of law, they are widely accepted in the accounting profession and in some cases influence subsequent SEC rules on disclosure. In some cases, FASB statements on disclosure are modified after the reaction to them by the accounting profession has been determined.


SEC regulations require publicly owned companies to disclose certain types of business and financial data on a regular basis to the SEC and to the company's stockholders. The SEC also requires disclosure of relevant business and financial information to potential investors when new securities, such as stocks and bonds, are issued to the public (with exceptions for small issues and private placements).

The current system of mandatory corporate disclosure is known as the integrated disclosure system. By amending some of its regulations, the SEC has attempted to make this system less burdensome on corporations by standardizing various forms and eliminating some differences in reporting requirements to the SEC and to shareholders. The system integrates the different requirements of the 1933 and 1934 acts and those of shareholder reports.


Publicly owned companies are in the habit of preparing two annual reports, one for the SEC and one for their shareholders. Form 10-K is the annual report made to the SEC, and its content and form are strictly governed by federal statutes. It contains detailed financial and operating information. In 10-K reports, management typically provides a narrative response to specific questions about the company's operations, and public accountants prepare the detailed financial statements.

Historically, companies have had more leeway in what they include in their annual reports to stockholders. Over the years, however, the SEC has gained more influence over the content of such annual reports, primarily through its statutory power concerning proxy statements. By amending its rules covering proxy statements, the SEC has been able to increase its authority over the content of corporate annual reports. Since most companies mail annual reports along with their proxy statements, they must make their annual stockholder reports comply with SEC requirements.

SEC regulations require that annual reports to stockholders contain certified financial statements and other specific items. The certified financial statement must include a two-year audited balance sheet and a three-year audited statement of income and cash flows. In addition annual reports must contain five years of selected financial data, including net sales or operating revenues, income or loss from continuing operations, total assets, long-term obligations and redeemable preferred stock, and cash dividends declared per common share.

Annual reports to stockholders must also contain management's discussion and analysis of the firm's financial condition and results of operations. Following broad guidelines provided by the SEC, this section of the annual report should focus on the company's financial condition, changes in financial condition, and results of operations. Management's discussion and analysis should disclose or discuss the firm's liquidity, capital resources, results of operations, any favorable or unfavorable trends in the industry, and any significant events or uncertainties.

Other information to be included in annual reports to stockholders includes a brief description of the business covering such matters as main products and services, sources of materials, and status of new products. Directors and officers of the corporation must be identified. Specific market data on common stock must also be supplied.

One objective of the SEC's integrated disclosure system is to require that similar information be disclosed in SEC filings as in reports to shareholders. The basic information package that publicly owned companies must disclose includes audited financial statements, a summary of selected financial data, and management's description of the company's business and financial condition. As a result, annual reports to shareholders now contain more detailed financial information than before.


Private companies that wish to become publicly owned or "go public," must comply with the registration requirements of the SEC. In addition companies floating new securities must follow similar disclosure requirements. The required disclosures are made in a two-part registration statement that consists of a prospectus as one part and a second part containing additional information. The prospectus contains all of the information that is to be presented to potential investors. It should be noted that SEC rules and regulations governing registration statements are subject to change.

In order to meet the disclosure requirements of new issue registration, companies prepare a basic information package similar to that used by publicly owned companies for their annual reporting. The prospectus, which contains all information to be presented to potential investors, must include such items as audited financial statements, a summary of selected financial data, and management's description of the company's business and financial condition.

In effect a company seeking to go public must disclose its entire business plan. In addition to the basic data noted above, the registration statement must disclose the company's material business contracts and all forms of cash and noncash compensation given to the chief executive officer and the top five officers making more than $100,000 a year. Compensation paid to all officers and directors as a group must also be disclosed.

An important part of the company's registration statement is management's description of the company's business and financial condition. In the prospectus management must cover such areas of the business as results of operations, liquidity, capital resources, and the impact of inflation . Management must also focus on events and uncertainties that might affect future operating results. Potential investors must be given an indication of the amounts and certainty of cash flows from operations and other sources.


Additional disclosure laws apply to the securities industry and to the ownership of securities. Officers, directors, and principal stockholders (defined as holding 10 percent or more of the company's stock) of publicly owned companies must submit two reports to the SEC. These are Form 3 and Form 4. Form 3 is a personal statement of beneficial ownership of securities of their company. Form 4 records changes in such ownership. These reporting requirements also apply to the immediate families of the company's officers, directors, and principal stockholders. It is through these forms that insider trading is reported to the SEC and becomes public record.

Individuals who acquire 5 percent or more of the voting stock of a SEC-registered company must submit the appropriate form (either Form 13D or 13G) to the SEC. The form must be filed within ten days of reaching the reporting level of stock ownership.

Securities broker-dealers must provide their customers with a confirmation form as soon as possible after the execution of an order. These forms provide customers with minimum basic information required for every trade. Broker-dealers are also responsible for presenting the prospectus to each customer for new securities issues.

Members of the securities industry are also subject to reporting requirements of their own self-regulating organizations. These organizations include the New York and American Stock Exchanges for listed securities transactions, the National Association of Securities Dealers (NASD) for over-the-counter traded securities, and the Chicago Board of Exchange for all listed equity, debt , stock index, and other option activities.

One area of the securities industry in which new disclosure rules are being developed by the SEC is that of mutual funds . While mutual funds must issue a prospectus for potential investors, the prospectus does not have to disclose what stocks and bonds the fund owns. The language of some prospectuses as they are currently written also does not clearly indicate the risks and potential rewards of investing in the mutual fund. More information about the compensation paid to the fund's director and other fees may also be required, along with information about the effect of such fees and compensation on the performance of the fund.


Generally accepted accounting principles (GAAP) and specific rules of the accounting profession require that certain types of information be disclosed in a business's audited financial statements. As noted above, these rules and principles do not have the same force of law as SEC rules and regulations. Once adopted, however, they are widely accepted and followed by the accounting profession.

It is a GAAP that any information must be disclosed in a financial statement if its nondisclosure would tend to mislead readers of the statement. That is, financial statements must disclose all significant information that would be of interest to a concerned investor or creditor. The relevant information may be disclosed in a footnote, a separate schedule, or another part of the financial statement. Among the types of information that accountants must disclose are accounting policies employed, litigation in progress, lease information, and details of pension plan funding. Generally, full disclosure is required when alternative accounting policies are available, as with inventory valuation, depreciation, and long-term contract accounting. In addition accounting practices applicable to a particular industry and other unusual applications of accounting principles are usually disclosed.

Certified financial statements contain a statement of opinion from an auditor, in which the auditor states that it is his or her opinion that the financial statements were prepared in accordance with GAAP and that no material information was left undisclosed. If the auditor has any doubts, then a qualified or adverse opinion statement is written. Under AICPA Statement on Auditing Standards No. 32, auditors must issue a qualified or adverse opinion when they conclude that audited financial statements omit information required by GAAP.

Disclosures required by the rules and regulations of the accounting profession may exceed those required by the SEC. For example, FASB statement No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," which affected the 1994 financial statements of many companies, called for more-complete disclosures by businesses and nonprofit organizations about the derivative financial instruments they held. Derivatives are financial agreements, such as futures and options contracts, whose returns are linked to, or derived from, the performance of underlying assets. They are considered volatile investments, and the lack of specific disclosures about them was considered misleading to interested investors and creditors.


Another area of business in which disclosure laws play a role is consumer lending. Under Federal Reserve Regulation Z, commonly known as the Truth in Lending Act, lenders must disclose certain types of information to borrowers. This regulation applies to anyone making loans to consumers, including banks, savings and loan associations, credit card issuers, hospitals, finance companies, and others. Among the types of information that must be disclosed are conditions under which a finance charge may be applied, when payments may be made without incurring a finance charge, the method of determining finance charges, the periodic rate used and the corresponding annual percentage rate, the minimum periodic payment required, and similar information.

Automobile leases are covered by state disclosure laws, which in turn are governed by the Consumer Leasing Act of 1976. That legislation was revised in 1996 by the Federal Reserve Board when it issued a new Regulation M. The new leasing rules became effective October 31, 1996, with mandatory compliance required by October 1, 1997. Segregated disclosure of certain items was required to help consumers focus on key information in the lease agreement. In addition, new disclosures were required by Regulation M.

Other areas of business affected by disclosure laws include employment, the sale of property, and environmental issues. Court rulings on disclosure laws indicate a movement away from the traditional "Let the buyer beware" (caveat emptor) concept toward one of good faith and fair dealing. Thus, in sales of goods and property, courts have ruled in some cases that sellers have the obligation to disclose information to buyers when it would be difficult for buyers to find it out on their own. In employment matters, courts have sometimes held that employers have an obligation to disclose the company's weak financial condition or the fact that a candidate's position may soon be eliminated.

To avoid court challenges in areas where disclosure laws are subject to interpretation, businesses need to err on the side of disclosing information rather than concealing it. The information given must be timely, accurate, and complete. To protect themselves, businesses should keep records of what has been disclosed.

[ David P Bianco ]


Bordwin, Milton. "Your Duty to Disclose: What You Don't Say Can Land You in Court." Management Review, July 1996, 55-57.

CCH Editorial Staff. SEC Handbook: Rules and Forms for Financial Statements and Related Disclosures. Chicago: CCH, 1996.

Hertz, Robert H. The Coopers and Lybrand SEC Manual. 7th ed. New York: Wiley, 1997.

Karlin, Joel M. "Uniform Disclosure for Health Insurance: It's about Time." American Medical News, 7 April 1997, 27-28. Rojc, Kenneth J., and Thomas K. Juffembruch. "Impact of the New Regulation M on State Motor Vehicle Leasing Disclosure Laws." Business Lawyer, May 1997, 1101-15.

Schroeder, Michael. "SEC Proposes New Rules to Streamline Stock Offerings by Public Companies." Wall Street Journal, 16 October 1998, A2.

Seligman, Joel. The SEC and the Future of Finance. Westport, CT: Greenwood Publishing, 1985.

U.S. Securities and Exchange Commission. Directory of Companies Required to File Reports with the Securities and Exchange Commission, under the Securities Act of 1934. Washington: GPO, 1998.

User Contributions:

Richard none Gray
Brought a 2007 motorhome and now I find out it is sitting on a 2000 frame and engine.There was no disclosure of this fact made to me.I feel cheated because this has to hurt the value of the vehicle.They tell me it is quite common for maker s of motorhomes to do this but what about the smog requirements for DMV?

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