"Investor Education Policies and Program" Remarks Of Isaac C. Hunt, Jr. Commissioner* U.S. Securities and Exchange Commission Washington, D.C. Financial Services Board of South Africa Johannesburg, South Africa May 26, 1997 ______________ * The views expressed herein are those of Commissioner Hunt and do not necessarily represent those of the Commission, other Commissioners or the staff. Thank you for the kind introduction. A special thanks also to the Financial Services Board of South Africa, for hosting this event, and Eduardo Manhaes Ribeiro Gomes, of the Comissao de Valores Mobiliarios ("CVM") of Brazil, the Chairman of Working Party No. 5 of the Emerging Markets Committee of IOSCO, for inviting me to speak. The speakers addressing this workshop on collective investment schemes are very knowledgeable, and I am sure that you will benefit from their views and experiences. While I do not intend for my remarks to be controversial, let me offer the standard SEC disclaimer that the views I express are my own, and are not necessarily the views of my agency, my fellow Commissioners, or the SEC's staff. The United States Securities and Exchange Commission -- the "SEC" -- has the responsibility of ensuring that the U.S. capital markets operate in a fair and orderly manner. The primary touchstone by which the SEC acts is investor protection, and the express responsibility to protect investors appears throughout the various United States federal securities laws. But we must contemplate other considerations before acting; for example, our actions, whenever possible, should either assist the capital formation process or at least should not unnecessarily impair that process. Investor protection and capital formation, of course, are not mutually exclusive objectives. I firmly believe that the investment climate in any country improves with the development of investor confidence in the openness and honesty of its securities markets. In recent years, the SEC has realized that one of the best ways to increase confidence in the U.S. markets is through investor education and investor-targeted regulatory initiatives. I therefore was delighted to be asked to discuss those initiatives today. The SEC has tried to reach investors in many different ways, and I will talk about just a few. Two initiatives I will highlight are regulatory ones designed to make investment documents more useful to investors, while the other initiatives I will discuss are in the nature of more "traditional" investor education programs. Improvements to Mutual Fund Offering Documents. Like most publicly sold securities in the U.S., collective investments offered to the public, such as mutual fund shares, are subject to disclosure requirements under our federal securities laws. To sell shares, a mutual fund must register the securities they offer with the SEC, and it must deliver a prospectus with financial and other important information to each investor. The SEC currently is involved in an effort to make fund prospectuses more user-friendly. We just proposed a major overhaul of the existing prospectus form for mutual funds. Our goal is for prospectuses to become easier for investors to understand and easier for funds to prepare. We also proposed to provide investors with a "fund profile"; this would be a document of only a few pages that would summarize key fund information. Although the primary disclosure document would continue to be the prospectus, the fund profile could be used by an investor to learn quickly about a particular fund, or to aid in comparing various funds in the same mutual fund complex or across fund complexes. In both the fund prospectus and summary fund profile, the SEC hopes to provide investors with better risk disclosure and, in particular, a better sense of the risk of a fund's investments as a whole. This would be a shift away from our current approach of giving detailed, technical descriptions of the risks of individual securities held by a fund. Plain English. Next, I thought I would discuss the SEC's recent commitment to "plain English" investor documents. While we have taken several positive steps with respect to plain English, let me first tell you how we got to where we are on this matter. Over the last few decades, many in the U.S. have lost sight of the fact that the disclosure documents filed with the SEC are not only liability documents -- they are one of the primary ways that issuers communicate with investors. Our markets have become so complex. Corporate transactions and financial instruments are more and more complex. And, I certainly will admit that SEC regulations are not always shining examples of simplicity. Under the leadership of Chairman Levitt, the SEC is engaged in a plain English campaign. The campaign began with a pilot program. As part of that program, SEC staff began urging companies to write disclosure documents that investors can better understand. In September 1996, the Bell Atlantic Corporation and NYNEX, early volunteers in the pilot, filed certain of their merger proxy and prospectus documents in plain English. The companies found that the switch to plain English did not cause delays or greater costs. Other companies have since joined the voluntary pilot program. More recently, the SEC proposed a plain English rule. The proposed rule would apply to all prospectuses. It would require issuers to prepare the cover page, summary, and risk factors sections of the prospectus using plain English principles. Required disclosures would have to avoid legal jargon and highly technical business terms, use everyday words and short sentences. The design of the sections may include pictures, charts, graphs and other design elements, so long as the required information is presented clearly. Our proposal also would add to the present requirement that the information in a prospectus should be presented in a clear, concise, and understandable fashion. Overly complex presentations would be out. Boilerplate explanations would be out. Complex information copied directly from other legal documents would be out. Along with proposing the plain English rule, the SEC issued a draft of a plain English "Handbook." It was released in draft form to encourage issuers, other market participants, and investors to review it and send us suggestions on how it can be improved. Investors are enthusiastic about our plain English efforts. Some market participants, however, have expressed concern that our emphasis on plain English will expose them to greater liability. We strongly believe that this concern is misplaced. I know of no case that has held anyone liable for clearly and accurately disclosing material information to investors. In all likelihood, liability will decrease with the use of plain English since it will result in less confusing disclosure. Investor Education Programs. The SEC also recognizes that the best defense against fraud and abusive securities practices is an educated investor. The SEC established an Office of Investor Education and Assistance to act as a clearinghouse of information and support for individual investors. The Office receives tens of thousands of telephone calls each year from investors who have questions or complaints. The questions asked run the gamut from whether a broker or investment professional is properly licensed to do business, whether a company is registered with the SEC, the worth of old stock certificates, and what to expect from bankruptcies and reorganizations. The complaints received have at times led to referrals to our enforcement staff for investigation and to enforcement cases. The Office also educates investors on how to identify, avoid, and report securities fraud and abuse through the development and distribution of educational materials. These materials -- such as one offering investors general tips on how to invest wisely, and another warning investors of potential investment frauds on the Internet -- are available through a toll-free telephone number at the SEC or through the SEC's Website. In fact, the SEC is beginning to rely more and more on the Internet to efficiently reach a mass audience. Our Website is www.sec.gov and, in just a short time, it has become one of the most popular government sites on the World Wide Web. Investors not only may access educational materials and publications, but also investor alerts, speeches by the Chairman and the other Commissioners, and information about certain enforcement proceedings. The Website also displays our proposed rules, as well as the comments to such proposed rules received electronically at the SEC. We also have a few "hyper-links" set up to non-SEC Websites, such as the Websites for the Small Business Administration and the stock exchanges. The SEC also organizes investor and small business town meetings at locations throughout the U.S., where investors or small business owners can address questions in person to Commissioners and high-ranking staff members. These meetings allow us to hear directly from investors and small business owners, answer their questions in person, and find out what changes or ideas they have. We also have been able to get state securities regulators, self-regulatory organizations, and representatives from industry groups to give seminars at these town meetings. Additional work on investor education is currently being completed by the Council of Securities Regulators for the Americas. Chaired by our colleagues from Brazil, COSRA also operates as IOSCO's American Regional Committee. This June COSRA will complete its investor education project and will report to IOSCO and the EMC. Our hope is to build on this initiative more broadly so that investor education and protection will remain at the forefront of IOSCO's efforts. Thank you. I would be delighted to take any questions that you have.