Re: Plain English Disclosure (Release Nos. 33-7380; 34-38164; IC-22464;
Dear Mr. Katz:
PSA The Bond Market Trade Association ("PSA") is pleased to submit hereby its written comments in response to the above-captioned Release. These comments express principally the views of various PSA member firms involved in the activities of our Corporate Bond Division. 1 Most of these firms have had the pleasure of meeting on several occasions during the course of the past nine months with representatives of the Securities and Exchange Commission (the "Commission") who explained in detail the reasoning and rationale underlying the Commission's "plain English" initiative, including the salient questions set forth in the Release.
PSA would like to take this opportunity to express its appreciation to those SEC staff members who participated in the above-mentioned meetings. Based in part on the input provided at these meetings, PSA fully supports the goals of the plain English initiative. We believe full and adequate disclosure of the material elements of securities offerings is the cornerstone of the Federal securities laws, and plain English standards in conjunction with such disclosure will generally enhance efficiencies in the marketplace and promote meaningful investor protection goals.
In light of the above, PSA believes it is critical to emphasize the need for education with respect to the implementation of plain English. In this regard, we feel the following recommendations are noteworthy:
The concern expressed by PSA members, reflecting concerns held by the dealer community but also applicable to issuers, is that when complex provisions with many details are restated in different words, it is nearly inevitable that a different meaning will be expressed. We are not aware of any case law or empirical data to support this view. We do not believe that this proves that liability concerns are imagined. Furthermore, where there is an emphasis on reducing the amount of detail and focusing on only the most important points, more minor details - which are nonetheless part of the picture - are likely to be eliminated.
Complex prospectus disclosure frequently arises in the context of descriptions of provisions in indentures and other documents affecting securities, such as leases, mortgages, insurance policies and corporate charter documents. These underlying documents tend to be carefully crafted to accomplish several goals, including:
However, if plain English does become a requirement for all registration statements, these senior staff members will have little direct involvement with the staff review made of those registration statements. In 1995, the Commission made full disclosure reviews of 1,980 Securities Act registrations. 2 Clearly this work is, and will continue to be, broadly distributed among SEC staff members. PSA members are concerned about the level of commitment and understanding of plain English principles of the many staff members that will administer the new rules.
Staff examiners will need to be trained adequately. The specific plain English rules establish highly subjective standards: short sentences; descriptive captions; use of glossaries but avoidance of frequent reliance on defined terms; and non-legal, non-technical terminology. 3 The problems inherent in these standards can be demonstrated by one of the before-and-after examples in the Plain English Handbook. On pages 32 and 33, under the heading "Use Short Sentences", the "before" sentence is complex and contains 77 words. The second redrafted alternative uses bullet points and is significantly clearer than the original, but contains 89 words. Both versions substantially exceed the 25 to 30 word ideal stated in the Release. Can issuers and underwriters be confident that Commission staff will favor the clearer disclosure even if it "breaks the rule" requiring short sentences? Furthermore, as acknowledged in the Release, "There is no one absolute form of plain language." 4 Any attempt to mechanistically judge whether the plain English rules have been followed is likely to yield arbitrary and capricious results.
We believe that a strong training program for examiners who review registration statements will do much to alleviate any problems. PSA members offer their services in that process, to help examiners understand the drafters' perspective on the review process.
Reviews for plain English compliance should be part of the normal full review process, not a separate limited review. PSA believes that the plain English review should be part of the ordinary full review process, rather than the subject of limited reviews of a broader universe of filings. PSA members would oppose instituting limited reviews to check for compliance with the plain English principles, in those cases where the subject filing is not selected for a full review. In recent years, limited reviews were conducted as to "event risk" disclosure; PSA members believe that any benefits derived from such limited reviews did not outweigh the significant delays they created in the timing of transactions. Furthermore, a "limited" plain English review would be significantly more involved and time-consuming than were the event risk reviews, requiring a detailed reading and more extensive comments. We would ask that the Commission clarify, at the time that any plain English rules are adopted, its intention as to monitoring filings in the review process for this purpose.
1. Changes to Item 501 of Regulation S-K
PSA generally supports the proposals with respect to Item 501 of Regulation S-K ("Front of Registration Statement and Outside Front Cover Page of Prospectus"), which call for changes to the format and content of the prospectus front cover page. We believe that overall the proposed changes will remove from the front cover page material that is not of primary importance to investors (such as details of the underwriting arrangements) and leave more space for the issuer to use for most important disclosure. We also support the Commission's decision to omit specific requirements as to print type or font size on the cover page, leaving such matters to the discretion of the issuer and underwriters. Our concerns about the Item 501 proposals are set forth below.
Retain the cross-reference on the cover page to the risk factors section. We believe that the risk factors section is one of the most important parts of prospectuses that contain them. We therefore believe it is important to point the reader to the location inside the prospectus where this important information can be found. We recommend that the proposed version of Item 501 be changed to continue to require the front page cross-reference to the risk factors disclosure.
Remain flexible as to underwriters' use of their established front cover style manuals. No less than any corporate colors, typeface or other style, PSA members have developed and used prospectus cover page styles which differentiate their "products" from those of their competitors. We strongly urge the Commission to be flexible in permitting PSA members to continue to use these unique styles so long as they also seek to follow the plain English principles. We believe that the rules as proposed permit PSA members sufficient latitude to do so.
2. Changes to Item 502 of Regulation S-K
PSA supports the proposed changes to Item 502 of Regulation S-K ("Inside Front and Outside Back Cover Pages of Prospectus"). We believe that these proposals will remove much of the boilerplate material from these areas of the prospectus and overall improve readability.
In response to the specific question in the Release, PSA members do not believe that the back cover legend describing the dealer's prospectus delivery obligations is necessary for purposes of reminding the dealer of these obligations. Their own internal compliance procedures are adequate to provide for deliveries where required.
3. Changes to Item 503 of Regulation S-K
PSA supports the proposed changes to Item 503 of Regulation S-K ("Prospectus Summary, Risk Factors and Ratio of Earnings to Fixed Charges"), subject to the overall liability and other concerns discussed above about the plain English process in general.
In response to specific questions raised by the Commission in the Release, we would make the following comments:
5. Commission's Cost-Benefit Analysis
On the benefit side of the analysis, we would point out that while the proposals may offer significant benefits to individual investors, the benefits to the sophisticated institutional investors that dominate the corporate debt markets are less clear. 5
PSA believes that the Commission's analysis of the likely cost of the proposed rules overlooks the two factors described below.
Increase in length of most prospectuses. PSA believes that there is likely to be an increase in length of prospectuses which follow the plain English principles. We believe that such documents will be longer for two reasons:
On behalf of PSA, thank you for your interest in our views and for your ongoing cooperation on this matter.
Very truly yours,
Senior Vice President
and General Counsel
|1||PSA represents approximately 220 securities firms and banks which underwrite, trade and sell debt securities, both domestically and internationally. PSA's member firms, many of which are active in the Corporate Bond Division, participate in approximately ninety-five percent of the initial distribution and secondary market trading of corporate debt securities, including investment grade and non-investment grade corporate debt securities as well as mortgage and other asset-backed securities. More information about PSA is available on PSA's Internet home page at http://www.psa.com.|
|2||See 1995 Annual report of the Commission, appearing on the Commission's website.|
|3||Proposed Rule 421(b)(1) - (4).|
|4||Release at page 3155, quoting from Robert D. Eagleson, What Lawyers Need to Know About Plain Language , Michigan B.J. 44 (1994).|
|5||As of year-end 1996, PSA estimates that only about 10% of corporate bonds were held by individual investors.|