March 31, 1997

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-6009

Re: File No. S7-3-97

Ladies and Gentlemen:

This letter responds to the Securities and Exchange Commission's request in Release Nos. 33-7380 and 34-38164 (the "Release") for comments on its proposed rules implementing plain English principles in certain portions of filings made under the Securities Act of 1933.

A drafting committee consisting of members of various subcommittees of the Committee on Federal Regulation of Securities, Section of Business Law of the American Bar Association prepared these comments. The drafting committee circulated a draft of this letter for comment among the Chairs and Vice-Chairs of the other Subcommittees and Task Forces of the Federal Regulation of Securities Committee, the members of the Advisory Committee of the Committee and the officers of the Section. A substantial majority of those who reviewed the letter in draft form have indicated their general agreement with the views expressed. However, this letter does not represent the official view of the American Bar Association, the Section or the Committee, nor does it necessarily represent the views of all members who drafted or reviewed it.


We find it hard to argue against plain English: we always prefer clear, concise writing to dense, turgid and hard-to-read prose. We also find it hard to argue against the proposition that most securities professionals would benefit from guidance on how to write more clearly. We are concerned, however, that the Commission's efforts to mandate a particular style of writing may be too ambitious.

Rule 421(b) requires information in a prospectus to be "clear, concise and understandable. . . ." We believe that this rule is sufficient for the Commission to accomplish its objectives. The plain English proposals clarify the meaning of "clear, concise and understandable" and, in the case of proposed Rule 421(d), require substantial compliance with specific plain English principles on the front and back cover pages, the summary and the risk factors. We believe the Commission should inform issuers and their advisers how it intends to enforce the "clear, concise and understandable" requirement without adopting Rule 421(d).

We suggest that the Commission use the method it employed in the 1989 MD&A release (No. 34-26831; May 18, 1989) to provide guidance about writing clear, concise and understandable prose. That release has proven immensely helpful to issuers and securities practitioners and, we believe, has generally upgraded the quality of issuers' MD&A. The Commission could use the section of the Release identifying the elements of plain English (Section III), along with the new language proposed for Rule 421(b) and Rule 421(d), as an interpretive release for Rule 421(b). To the extent that the Commission believes it necessary to impose specific informational or format requirements for the front and back covers, the summary and the risk factors, it could do so with a new Rule 421(d). We do not believe that adding new language to the rule itself elucidating plain English principles will achieve more effectively the desired result.

The Commission itself has demonstrated the difficulty in complying with the plain English rules by writing rule 421(b) primarily in the passive voice.

People do not always apply plain English principles when they speak or think, and certainly not always when they write --when they believe those principles have merit they believe they have followed them. We often do not realize that we have used the passive voice. And although passive voice sentences conceal the actor, they may be perfectly clear--example, we all understand the meaning of, "The meeting was adjourned."

The Commission's goal should be clear, concise and understandable writing, not as an end in itself, but because it produces full and fair disclosure. The plain English principles may be one way to reach that result. To elevate them to a status of the one true way, however, would be a mistake.

The plain English principles

Even if we accept that the goal of the plain English proposal is to encourage clear, concise writing, we are not convinced that all of the principles will necessarily lead to that result. Securities professionals who write prospectuses often must describe complex businesses, transactions and agreements as concisely as practicable without losing crucial nuances. Not all complex concepts can be explained in simple language. Drafters of prospectuses may have developed the "legal and highly technical business terminology" that they use, because simpler, everyday terminology did not convey the appropriate complexity of meaning.

The Commission's plain English initiatives would require issuers to summarize dense, often technical documents (indentures, merger agreements, etc.). In some cases, only the exact language of the relevant agreement adequately conveys the meaning. Omissions are always evaluated in hindsight. For liability purposes issuers may still prefer to have the exact language in the disclosure document rather than a "plainer", but less exact, summary of those provisions.

As examples, we would like to discuss two types of transactions that rely heavily on defined terms: high-yield debt deals and asset securitizations. In a high-yield debt deal, the investors will be particularly interested in the issuer's financial covenants. Issuers, underwriters and their counsel must design a covenant package that limits the financial risk to investors without restricting the issuer's ability to operate its businesses successfully. These covenants must recognize regulatory limitations (such as dividend restrictions for insurance companies), existing debt and other securities, tax considerations and other limitations. Because each company is different, a generic covenant definition for "Fixed Charge Coverage Ratio" does not exist, and a sophisticated investor will need the full text of the definition, and the definitions within the definition, to understand completely the protection afforded to such investor by the issuer's agreement to maintain the ratio at a particular level.

Asset securitizations also defy simple descriptions. A typical prospectus may, for example, describe the security to be sold as a "fractional undivided interest in a trust, the assets of which consist primarily of a pool of receivables"--very legalistic-sounding phrase. The real meaning of that description relies on the provisions of the securities that govern how collections and losses on that pool of receivables are allocated among investors and others owning "a fractional undivided interest" in the same pool--most of the rest of the prospectus describes those provisions. The overwhelming majority of purchasers of asset-backed securities are institutional investors, however, who understand the concept of a fractional undivided interest in a trust, and would expect that term to be used.

Asset-backed securities prospectuses use defined terms extensively because these terms are the only feasible way to discuss complex concepts. An asset securitization is a complex mathematical structure with interdependent variables. Just as a mathematician might designate "the percentage equivalent of a fraction the numerator of which is the interest in receivables represented by a particular class of investor certificates and the denominator of which is the lesser of the number of receivables in the trust or the sum of the numerators used in calculating the percentage with respect to all classes representing interests in receivables in the trust" as "x divided by y"--the mathematician would still have to define "x" and "y"--professionals would call it the "Class Percentage," define it once in a glossary, and use the defined term everywhere else in the prospectus that they needed to refer to that concept. They cannot describe these transactions without defining the mathematical variables that go into them; the best they can do is to name those variables in ways that they hope will be useful to investors.

Finally, we are concerned about the proposal that "the educational background and financial sophistication of your current or prospective investors should dictate the language you use." How can issuers possibly assess the level of sophistication of the target audience? Mustn't issuers assume in any Securities Act disclosure document that a less experienced individual investor may be the ultimate audience? Existing Commission and self regulatory organization requirements that broker-dealers make investor suitability determinations are the proper way to prevent unsophisticated investors from purchasing in inappropriately complex offerings. Issuers should be permitted to assume in drafting their disclosure documents that broker-dealers will only offer the securities to investors of the requisite sophistication. Accordingly, we believe that disclosure should be written for a hypothetical investor of average sophistication.

Summary of Comments

We have summarized below our principal comments and recommendations on the release.

! Instead of adopting the proposed changes to Rule 421(b) and new Rule 421(d), the Commission should embody the principles in an interpretive release.

! We generally support the efforts to allow registrants flexibility in formatting the prospectus to present information in ways they believe will be the most informative to their audience.

! The plain English initiative should continue as a voluntary pilot program until the Commission and registrants have gained more experience in a wider variety of transactions.

! Given the substantial effort required to rewrite disclosure documents in a plain English writing style, the phase-in period for any mandatory use of plain English should be a year or more.

! We propose the Commission adopt a liability safe harbor for disclosure prepared in good faith to comply with plain English principles.

! The Commission should consider implementing any required plain English first in Exchange Act periodic reports where there is a greater opportunity for planning, rather than in more time-sensitive Securities Act filings.

Plain English Rule Proposals

Notwithstanding our general view that the plain English proposals may in some instances impede the goal of clear disclosure, we offer the following views on a number of the specific proposals.

New Rule 421(d) and Revisions to Rule 421(b)

First, we have several questions about the language as proposed:

. Rule 421(d) seems simply to repeat and paraphrase the principles in Rule 421(b). Are the six plain English principles in Rule 421(d) different from the standards set forth in Rule 421(b) for the rest of the prospectus? We note that the text of and note to paragraph (b) do not mention active voice and multiple negatives, but address all other points mentioned.

. Is there any significance to whether a principle appears as one of the clauses in the text of paragraph (b) versus one of the clauses in the Note to that paragraph?

. We note that the two paragraphs variously use "shall", "should" and "must" in establishing the plain English prescriptions and proscriptions. Are principles that "should" be followed more optional than principles that "must" be followed? Although this may appear to be nit picking, we think this point helps demonstrate why plain English principles may be more appropriate as interpretive guidance.

Second, new Rule 421(d) permits, and the release encourages, issuers to experiment with the design of the front and back covers and the summary and risk factors. We note that disclosure can be enhanced when a reader of a document knows precisely where to turn to obtain specific information. In particular, cover pages have become fairly standardized in their presentation of information and we believe that there are benefits to continuing that practice.

Outside Front Cover of the Prospectus (Item 501(b) of Regulation S-K)

We think the proposed changes to the cover page of the prospectus would be generally helpful. We have several suggestions and comments.

. In the interest of regulatory economy, the Commission should not repeat the plain English principles and design requirements in the introductory paragraph to Item 501(b), but should simply cross reference Rule 421.

. We are comfortable that the information that the Commission has proposed to move from the front cover can be appropriately moved. If issuers elect to include on the front cover information not required, such as a description of the over-allotment option to the underwriters or a list of the expenses of the offering, we assume that the Commission staff will not object.

. The currently required price and commissions table clearly presents this important information. A bullet list will not make the disclosure any clearer. We hope that the Commission's proposed changes will not preclude registrants from using the table as currently formatted.

. The Commission should not distinguish between small business issuers and other issuers in requiring a cross reference to risk factors.

. We agree with the Commission that a bold, all caps format does not highlight important disclosure. Indeed, we believe that putting information in a bold, all caps format almost ensures that a reader will not read it. The Commission should not mandate any specific font, style or size. We note that many underwriters design prospectuses using "style manuals" that specify font, paragraph and table formatting and other visual aspects of the prospectus that identify the underwriter to investors as clearly as the underwriter's name on the cover. We believe the proposals should not preclude this practice from continuing.

. The proposed text of the legends seems clear to us. Did the Commission intend to delete the requirement that the caption "Subject to Completion" and the date appear on the front cover? We think that information is helpful and should be retained.

. The standards for partnership roll-ups should be the same as for other transactions. Although the Commission may require specific types of information for certain transactions, it should not mandate different styles of presentation for different transactions.

Inside Front Cover and Outside Back Cover Pages (Item 502)

We support the proposal to move to other places in the prospectus the technical information that the Commission currently requires to be included on the inside front cover. In addition, we have the following comments and suggestions:

. We are not sure that the information on the prospectus delivery requirements of dealers is necessary. For whom is this disclosure intended? If it is to remind the dealers, we question why it needs to appear so prominently on a disclosure document for investors. If it is for the investors, they will only be able to read it if the prospectus has in fact been delivered to them.

. The Commission should continue to permit issuers to include the table of contents on the back page of the prospectus. Many readers are accustomed to looking for an index at the back of a book. Having the table of contents on the back page also facilitates printing because all of the inside covers for preliminaries and finals can be run at the same time and the outside covers can be varied as necessary. We recommend that the Commission require issuers to include a table of contents and allow them to decide where to place it. They have no incentives to bury it in an obscure place in the document.

Prospectus Summary, Risk Factors and Ratio of Earnings to Fixed Charges (Item 503)

Requiring that the summary be brief makes good sense. Limiting the summary to a specific number of pages does not. Offerings vary greatly in their complexity and no one-size summary would fit all of them.

We do not believe the Commission should require certain information as part of the summary because the standardized practice that has developed is sufficient. We would not, however, object to such a requirement. We see no need to require a summary of management's discussion and analysis or condensed financial information, particularly because it would make the summary longer. With respect to the former, the information relates to the issuer and its business and not the offering. In addition, we believe that issuers include appropriate summary financial information under current practice, and the Commission does not need to intervene.

Short form registrations should have a summary where the length and complexity of the information in the prospectus makes it appropriate. Otherwise, they should not, and the Commission does not need to intervene here.

It might be helpful if the Commission clarifies whether it intends that the summary summarize all the information in the prospectus or only the terms of the offering. The summary almost never summarizes all the information in the prospectus, nor should it. There is usually no disclosure reason to summarize sections such as "Management" and "Description of Capital Stock," even though this information is often quite important, lengthy and complex. The Summary section of a prospectus in practice usually contains a brief description of the Company's business, summary financial information on an historical and as adjusted basis, and a summary of the terms of the offering. The Commission should consider making the requirement conform to the current practice. This goal can be achieved in a manner that is consistent with the Commission's desire that the summary be brief.

Most issuers currently list risk factors either in order of importance or in some other logically organized fashion that aids understanding . We strongly believe that the Commission should not require any specific ordering by rule lest placement of the factors become an independent claim in a securities lawsuit. We also believe strongly that the Commission should not limit the number of risk factors or the number of pages of risk factors. One size can not fit all issuers or offerings.

We suggest that the list of illustrative factors at the end of Rule 503(b) be deleted. By singling out these risks, the Commission ensures that these five risk factors will be included in every initial public offering. They do not provide any meaningful guidance and should be eliminated.

Staff Review

Pilot Program

Issuers appear to be willing to submit to the pilot program and thereby gain an expedited review of their filings. The Commission should continue to encourage this practice. We are not sure, however, that there has been enough experience under the pilot program to warrant extending it on a mandatory basis to all filings. The pilot program permits the Commission and the staff to exhort issuers to clearer, more concise disclosure and to generate more positive examples for those who do not participate. We believe the pilot program should be continued with the enthusiasm that the Commission and the staff have already shown it. The Commission should consider posting names of participants on its web site, perhaps with a link to the plain English filing.

Quite candidly, if the plain English rules are adopted, we are apprehensive about the difficulty in administering this regulatory initiative consistently across the various offices of the Division of Corporation Finance. Good writing is an art, not a science. The Commission should not underestimate the significant re-learning that will need to occur to achieve the desired results. It took more than 60 years for disclosure documents to evolve to their current state. Application of the principles will by no means be easy, but it will become easier as more examples of successes from the pilot program enter the market.

Staff Denials of Acceleration Requests

Is the amendment to clause (1) of Rule 461(b) intended to eliminate the requirement that, to the extent consistent with Rule 421(b), the issuer have made a bona fide attempt to make the prospectus as a whole concise and readable? That appears to be the impact of the proposed change.

Safe Harbor

We believe that the Commission should address liability concerns surrounding the plain English initiative. In particular, we recommend adoption of a safe harbor rule that would cover the summary and risk factors sections of the prospectus and other portions of the disclosure documents prepared in good faith to comply with that initiative. The rule could operate like Rule 175 in dealing with forward-looking statements and could exclude such material from serving as the basis for liability if the applicable good faith standard is met. This would cover concerns regarding omissions due to efforts to simplify and issues of fair presentation because more complex matters were covered towards the back of the disclosure document. Such a safe harbor rule would encourage issuers to comply with the initiative and present information in a clear, concise and understandable way.

We also believe that the Commission should make clear that failure to comply with the plain English requirements will not, in and of itself, result in civil liability under the antifraud rules. Rather, existing legal standards regarding adequacy of disclosure and fair presentation should continue to apply.

Phase-In Period

To the extent the Commission determines to make compliance with plain English principles mandatory, a phase-in would be appropriate. Voluntary compliance should be permitted immediately. Mandatory compliance should not be required until at least 12 months after adoption of the new rules. Shelf registration statements should continue to be exempt except for post-effective amendments and prospectus supplement filings made after the effective date.


We suggest that an expansion of the plain English initiative beyond the pilot program can best be commenced with Exchange Act periodic reports, rather than prospectuses and proxy statements. This would enable registrants to re-write their documents on a more predictable schedule, without the pressures of market access considerations and the Commission staff review process. It does seem somewhat ironic that under the current proposal an investor can receive a very simple plain English Form S-3 prospectus that contains no more information than the description of the securities and the plan of distribution (assuming, as is common with many S-3 issuers, that there is no need for a risk factors section), with all the issuer-specific information contained in incorporated Exchange Act reports not adapted to a plain English writing style.

Members of the Committee, and in particular of the Drafting Committee, are available to answer any questions you might have on our comments and to meet with the staff if that would assist the Commission's efforts.

Very truly yours,

John M. Liftin
Chairman, Federal Regulation of
Securities Committee

John J. Huber
Chair, Subcommittee on 1933
Act - General

Alan J. Berkeley
Vice-Chair, Subcommittee on
1933 Act - General

cc: The Hon. Arthur Levitt, Chairman
The Hon. Steven M.H. Wallman, Commissioner
The Hon. Isaac C. Hunt, Jr., Commissioner
The Hon. Norman S. Johnson, Commissioner

Drafting Committee:
Keith F. Higgins, Chair
John T. Bostelman
Robert W. Burke
Edward H. Cohen
Stanley Keller
Paige Maillard
Ellen L. Marks
Alan H. Paley
Gregory C. Yadley