Full Disclosure Explained

As strange as it may sound, full disclosure is just what it sounds like. The U.S. Securities and Exchange Commission (SEC) enacted the concept of full disclosure and made it a rule of law when Regulation FD became effective and legally binding in October of 2000. One of the main purposes for full disclosure as it was contained in Regulation FD was to ensure the proper flow of information to all investors. Here flow of information refers to access to important data or other information about a company that might be of interest to investors, and that might even upset a company's stock price if investors get shaken up enough.

Why Full Disclosure was Created

The intent of the SEC regulation FD was to create more of a level playing field to benefit smaller and less connected investors rather than larger accredited investors. Prior to full disclosure, something one could call partial or selective disclosure was the rule of thumb. Companies exercised their own discretion when sharing (or choosing not to share) pertinent information that might be of use to shareholders. Oftentimes information that could potentially affect investment decisions for all investors both large and small (i.e. the decision to hastily sell) was only shared with large and influential shareholders, with common stockholders left in the dark until it was too late and the damage had already been done. Only insider with connections to the board and to important decision makers had the access to this kind of information, damaging the finances of many shareholders in countless situations.

Before Regulation FD

Prior to the enactment of Regulation FD by the SEC, companies were largely self governing on the information they chose to share or keep to themselves. Securities analysts who followed corporations tended to get good information most of the time, but common stockholders were shut out time and time again. These analysts were thought to be useful in helping companies to adjust their practices and interpret information on shortfalls for the benefit of the companies.

If a corporation noticed weaker than projected sales, it would share the data with analysts, insiders who then relayed the message to large shareholders. The major shareholders would be able to unload shares before the prices plummeted. Conversely, the smaller shareholders were invariably left holding the bag, taking huge losses on their investments. Today, as a result of full disclosure, companies are required to publicly share this information, meaning smaller shareholders have equal access to important financial news right along with the larger shareholders.

Results of Full Disclosure

Ever since the enactment of Regulation FD, there have been some significant consequences of companies being compelled to grant this kind of equal access to all shareholders. Conference calls with the board that were once open only to analysts now are open to the public. Another change is that earnings shortfalls and reports of revenues that do not match up with earlier projections are as surprising to the big shooters as they are to the normal everyday people with maybe a relatively few shares of stock. Bigger changes in the price of a stock happen more frequently in stocks now that everyone is actually surprised when these surprises come out. And of course, without this unlimited access, analysts have to work harder than they once did to complete their research on companies they're studying.

Full disclosure rules even apply to accidental disclosures of information. If a company executive accidentally lets something spill at a meeting in private, the public has to be notified of that information as quickly as possible. Full disclosure forces more honesty out of companies.

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