"Fulfilling the Promise of Disclosure" Remarks by Arthur Levitt, Chairman U.S. Securities and Exchange Commission American Savings Education Council New York, New York July 23, 1997 I'm pleased to be here today to help further a cause that is near and dear to me: investor education. Once upon a time, the average American employee didn't have to worry about such things; most retirement plans offered defined benefits, and companies made all the investment decisions. With the proliferation of defined contribution plans, however, employees today are being asked to make their own investment decisions. To succeed and to provide for their future, they need to become informed about the market -- about its risks and rewards. So I applaud you all for participating in this conference, which focuses on the critical role employers play in providing financial education. I want to talk to you today about the SEC's campaign to improve disclosure and educate investors. Most of our efforts focus on that most important disclosure document: the prospectus. The British writer W. Somerset Maugham once remarked that "There are three rules for writing a novel. Unfortunately, no one knows what they are." He could just as well have been talking about prospectuses. It is possible that no document on Earth has committed as many sins against clear language as the prospectus. The prose trips off the tongue like peanut butter. Poetry seems to be reserved for claims about performance, and conciseness for discussions about fees. In fairness, much of the arcane language is aimed at legitimate legal concerns. But the fact remains that disclosure is NOT disclosure if it doesn't communicate. The time has come to pierce the shroud of jargon and boilerplate surrounding the prospectus. It's my aim to have prospectuses begin to speak a new language -- the English language. The SEC is now undertaking the most sweeping revision of disclosure in many years. New rules have been proposed that will change the face of both corporate and mutual fund prospectuses. These new rules may not represent the Holy Grail -- but they will make prospectuses simpler, clearer, more useful, and, we hope, more used. Signs of the prospectus's disuse are evident everywhere. One survey by the Investment Company Institute last year found that only half of fund shareholders consulted a prospectus before making an investment. Another survey by the SEC and the Comptroller of the Currency revealed that, although investors consulted the prospectus more than any other source of information about a fund, they considered it the fifth-best source of information -- after employer-provided written materials, financial publications, family or friends, and brokers. This take-or-leave attitude toward the prospectus has even seeped into popular culture -- like the cartoon that appeared in the Washington Post not long ago. A man and a woman are discussing investments, over a table covered with papers. The man cracks open a prospectus and says, "You know, I met a guy once who actually read one of these." There's no question that an overhaul of the prospectus is long overdue. The problem is not merely how we write prospectuses, but how we think about prospectuses. Investors today are bombarded with information from every quarter. The world has changed since the Securities Act was passed in 1933, but our rules about investor information haven't kept pace. In 1933, only 31 percent of American households had telephones. Today, 94 percent have telephones -- and 30 percent have computers that can turn their telephone line into the world's greatest library of information, the Internet. Back then, you had a limited number of financial instruments to choose from: stocks, bonds, and a handful of funds. Today, we have mutual funds investing in every conceivable instrument, including collateralized mortgage obligations, futures, options and other derivatives. I wouldn't be surprised if we soon saw funds holding the "Bowie Bond," a triple-A rated investment in the British rock star based on anticipated sales of his records. In 1933, investors could choose from 32 mutual funds; today, they have a staggering 6,540 funds to sift through. The radio was a primary source of information in 1933, but only 63 percent of US households had one -- and by the end of the decade, they had 847 stations to choose from. Compare that with 99 percent of households today, with more than 10,000 stations available. And I haven't even mentioned television, which was in its infancy during the 1930s. Even a decade later, in 1946, only 8,000 US households owned a set, and they had access to 30 stations. Today, 95 million households can tune in to more than 1500 stations, many of which are devoted to conveying financial information. No wonder people don't read prospectuses anymore -- if they ever did. We are the most wired, signaled, cabled, beeped, paged, plugged-in, on-line, and communicated-to society the world has ever seen. Years ago, the problem was a lack of information; today, it is a glut of information. Prospectuses have to work for investors, if they are to survive in the new world of information. As lawyers and regulators have loaded up the prospectus with more and more information, that document has strayed from its primary purpose of helping people decide whether to invest in a particular company or fund. Today, many prospectuses, by their very length and complexity, tend to obscure the essential information that would help people make investment decisions. One of the more startling pieces of information to come my way in 4 years as Chairman was a summary of an SEC focus group. We asked participants what sources of information they used in deciding whether to invest in a mutual fund. Their answer? Friends, family, brokers, financial advisers, magazines, newspapers, financial publications, the Internet, radio, and television. Only one investor mentioned using a prospectus. This disuse of the prospectus comes at a bad time: During the 1990s, a long decline in interest rates, a continued bull market, and the shift from defined-benefit to defined-contribution pension plans have sparked a mass migration of investors away from bank accounts, CDS, and other insured products, and into our stock markets. Investors today have far more money in mutual funds -- some $4 trillion -- than in insured commercial bank deposits -- which total nearly $3 trillion. This huge influx into our securities markets has provided new opportunities for investors -- and new opportunities for America. But it's also increased risk -- and it's created confusion and a greater potential for disappointment among investors who don't understand their investments. The fact is, investors are not as informed as they should be. This is especially troubling because most of these new investors have experienced only a bull market; I fear that in a downturn, those who don't understand risk may react precipitously and carelessly, at great cost to themselves and our markets. This new generation of investors has provided the impetus for our improvements in disclosure. It turns out that disclosure has two aspects: the information made available to investors, and the information that actually gets across to investors. We have done pretty well at the first part; we now need to focus on the second. We need to acknowledge that disclosure is NOT disclosure if it doesn't communicate. Our efforts began with the profile for mutual funds. Eight major fund families stepped forward to volunteer for a pilot project to develop a standardized summary prospectus that highlights key information about a fund. Several months ago the Commission proposed a new rule that would implement the pilot program. At the same time, the SEC proposed a complete overhaul of the mutual fund prospectus to make sure it focuses on information that helps people decide whether to invest. Early last year, we extended our efforts to include corporate disclosure. The Division of Corporation Finance, with help from our Office of Investor Education and Assistance, began a pilot to promote the use of plain English. We worked closely with companies to create new documents, pledging to review these documents in an expedited manner. This program has gone very well. Our volunteers' ranks are swelling, and in the months ahead we will have many more examples of plain English filings. Through these pilot programs, we've gained considerable knowledge about how to create clearer disclosure documents. To assure a smooth transition, we have also conducted workshops and our Office of Investor Education and Assistance has drafted A Handbook on Plain English: How to Create Clear SEC Disclosure Documents. This handbook features proven advice from our pilot participants and others who have created plain English documents, as well as a foreword by Warren Buffett. We have issued a draft of the handbook to the public and posted it on our web site. Investors support the use of plain English -- and so do many lawyers and corporate officials. They agree that the time has come to jettison the legalese and speak plainly to investors. They understand that plain English does not mean "dumbing down," or leaving anything important out of a disclosure document. It just means presenting complex information clearly. One of the main targets of our plain English initiative is the SEC itself. We recognize that we share responsibility for the state of the modern prospectus. Our passion for full disclosure has resulted in fact-bloated reports, and prospectuses that are more redundant than revealing. It turns out that more disclosure does not always mean better disclosure and that -- especially in an environment that virtually inundates us with data -- too much information can be as much a curse as too little. To raise the quality of communication with investors, the SEC itself must begin to write better. We're taking a number of steps to achieve that: We've brought in experts to teach us how to write more clearly, using language appropriate for those we're trying to reach. We've created a Plain English Task Force, under the leadership of Commissioner Isaac Hunt, Jr., to keep an eye on the documents, rules, and letters we produce and make sure they're as clear as can be. We're also now developing an SEC Style Handbook, which we hope to have on the desk of every SEC staff member later this year. I've made it clear to my division directors that I want SEC communications with the public drafted in the vernacular. There's no escaping it: The SEC has to practice what it preaches. And we are fully prepared to do so. The transition to plain English will not take place overnight; it is a process, incorporating several steps. We will consider a rule this fall to require all prospectuses to have cover pages, summaries, and risk factors written in plain English. It asks issuers to use the hallmarks of plain English in those sections of the prospectus: active voice, short sentences, everyday language, tables, and no legal or business jargon. We will begin with these key sections of the prospectus, but with the clear understanding that our eventual goal is to purge the entire document of words that, in the famous phrase of George Orwell, "fall upon the facts like soft snow, blurring the outlines and covering up all the details." We need your help, too, if we are to meet the key challenge of the next decade: Educating a generation of investors who, unlike their predecessors, will be solely responsible for ensuring that they have enough money for retirement. The Commission is always seeking to improve its efforts at investor education. In recent years, we have held dozens of town meetings throughout the country to teach people the right questions to ask. We've created a Web site that offers investor alerts as well as our huge EDGAR database of corporate information, so people can study companies before they invest in them. We've designed brochures and installed an special number people can call to get pre-recorded SEC information: 1 (800) SEC- 0330. But we would also like to tap your knowledge and experience. We'd like to work with you to improve the quality of the materials available to investors. Our efforts to educate must reach investors -- but they must also reach the recipients of the roughly 10 million lump sum distributions made each year. Jobs may end; but whether one is changing jobs or retiring, the need to invest wisely never ends. Our efforts must also reach the 40 percent of those eligible for a retirement plan, but not taking advantage of it. We must work together to motivate those employees, who are often at the lower end of the income scale. Today, companies are taking a cue from Madison Avenue and using high-powered marketing techniques to reach participants or potential participants. Outside communications consultants are being called in to help. Sophisticated advertising techniques, such as market segmentation studies and targeted audiences, are becoming the norm. Retirement planning workbooks and software are being made available, offering various strategies for employees to meet their funding goals. The Department of Labor is working hard to make sure working Americans understand and take better advantage of the retirement benefits available to them. Indeed, there's no lack of good ideas about ways to improve investor understanding. And if we succeed in improving investor understanding, not only do we win -- so do the 63 million Americans who invest in the market -- that's 63 million and growing every day. We have within our grasp a chance to help them -- a chance to change the way they buy securities, and to ensure their expectations are realistic -- a chance to make it easier for them to make comparisons, and easier to understand the key issues they need to know before investing. For when all is said and done, that's what these initiatives are about -- hardworking people reaching for a better life -- buying that new home, sending the children to college, taking that much-needed vacation, or enjoying a decent retirement. People looking to our capital markets as never before, for financial growth and economic success. This is the promise of America -- and few industries have brought that promise within the reach of more people than the securities industry. Let's build on that trend -- let's strengthen our markets and strengthen our people -- through better regulation and clearer communication. Thank you. # # #