SEC Proposed rule changes
File number: S7-03-97
Comments on the proposed rule changes from Plain English Campaign (USA) Inc.
We know that disclosure documents can be clarified without losing legal certainty or exposing companies to greater liability. Sadly, most current disclosure documents remain baffling to most potential investors.
The SEC will need to do everything in its power to help mutual funds and public
companies during this transition from traditional style drafting. This should involve:
Your proposed rule change document mentions criticisms of the plain English style. Unfortunately, these misconceptions are very common. You may help to dispel these myths by publishing a list of the plain English research findings which have been produced over many years in various countries. Research such as that carried out by the Law Reform Commission of Victoria, Australia has shown that the plain English style not only works but provides a much better option than traditional style drafting.
The proposed rule changes will help investors to understand and compare "the basics" of various offerings. We would expect that in complying with the rule changes it is inevitable that key information will be highlighted and redundant information will be removed. Ideally, we would like to see the total content of the disclosure documents written and designed using plain English techniques. We accept that this will take time. We are pleased to note that this does seem to be your long term intention. Your proposed rule changes will undoubtedly lead to clearer disclosure in the sections to which they apply.
The legal legends can and should be written in plain English. These legends should not be produced in continuous upper case letters. Emphasis and greater legibility can be achieved by the use of upper and lower case bold letters. Not only will plain English legends adequately inform investors, but they will also convey the intended meaning with much greater clarity than the traditional style.
Another problem which needs to be investigated is that of acronyms. There is a number of ways that these can be presented in a more understandable form. The words that make up the acronyms could be spelt out either on the first occasion that they are used, or throughout the document. (The tradeoff of spelling out these words throughout the document however, is that this will increase the length of the document.) Another option is to provide a glossary of acronym terms in the disclosure document. This problem could also be handled by creating a handbook which explains the financial terms and acronyms that investors are likely to come across in disclosure documents.
We would like to see a minimum amount of information on the front cover of the document. This information would include the name of the company and the type of security being offered. Other information such as the price and amount offered, and where the security can be bought, could be moved to the summary. This could be followed by a list of contents on the inside front cover page and then a summary of the offering. The summary could cover such aspects as a brief list of the risk factors. Summary sections should be required for all prospectuses. The main body of the text could then include the "technical information" and a full description of risk factors. A helpful style of cross-reference such as "For more detail about ............. please read the information on page....." could be included at the end of each section in the summary. (These cross-references could be deleted if the sections are clearly sign-posted in the list of contents.) The availability of Exchange Act reports could appear either in the main body of the text or the back page of the prospectus.
Having provided plain English techniques in the handbook, the SEC should allow companies enough flexibility to experiment with different styles of information design. There is no need to specify a standard font or typesize. It may be better to just to specify a minimum typesize with a medium to large "x-height". Another
alternative may be to list a number of easily readable fonts which are acceptable to the SEC. The list could include such fonts as:
We believe that there should not be a restriction on the number of pages for
the summary. Plain language information design sometimes requires more space
than the traditional style. This type of restriction may only tempt companies to:
As long as full disclosure is provided in the main body of the text, the summary only needs to contain the main points of the offering.
We believe that specified items of information should be required in the summary and the front cover. This will help investors to compare offerings from different companies.
There should be no limit on the number of risk factors or limit on the number of pages. The main risk factors could be described in the summary, and a full disclosure could be given in the main body of the text. The most important thing is that the risk factors are written in plain English.
We believe that eventually the SEC will need to make it mandatory for the total content of disclosure documents to be written and designed in the plain English style. Some writers of disclosure documents will view the changes towards plain English as just an extra burden on their time as they will have to learn to write in a different style. For this reason, we believe some writers will not change the way they write unless they are forced to do so.
The transition to plain English may involve additional costs. But, from experience, we would expect these additional costs to prove to be a cost effective investment. (Costly legal disputes can be avoided if investors fully understand disclosure documents.)
Everyone involved in the offering process should realize that a change in the SEC's rules will not be enough on its own to guarantee the clarity of disclosure documents. We must always be willing to learn from the successes and failures of the pioneers who are willing to try and make these complex financial documents understandable to the majority of investors.
March 18, 1997