Commission (SEC) took a giant step toward assuring readability of the all-important financial
prospectus.
The SEC requirements specify the use of reader-friendly plain English, also known as
plain language, in companies’ investment prospectuses. An issuing company is directed to draft
the prospectus with the uninformed shareholder in mind. Guidelines include the use of shorter
sentences and paragraphs; concrete, everyday language; active voice; and tabular presentation of
complicated information whenever possible. Bullet lists are recommended when information is
embedded in paragraphs, and wider margins are specified to aid in visual appeal. The guidelines
also specify the avoidance of obscure business jargon and multiple negatives. Risk factors must
be presented concretely and concisely and provide enough information to allow an investor to
assess the degree of risk.
Mastering the simplification of technical documents can present a significant learning
curve. While the SEC’s plain language requirements initially caused developmental delays for
some companies, subsequent filings have typically gone more smoothly. The general response
from consumers is that prospectuses are better.
Prudential Insurance Co. of America distinguished itself as one of the first companies to
comply with the SEC requirements for plain English. In addition to simplifying its prospectuses,
Prudential explains the product with liberal use of graphics, colors, summaries, large type, an
index, and captions. Metropolitan Life Insurance Company’s overhauled report features
characters from the “Peanuts” comic strip to illustrate key points. Boldface type, charts, and
sidebars help make the prospectus more interesting and easier for customers to understand.
A spokesperson for the SEC emphasized that writing in plain English doesn’t mean
writing with less substance. The Commission’s intent is not for issuers to “dumb down” their
prospectuses. “The overall idea behind requiring plain language is to try to make prospectuses
less intimidating for the average reader, with the hope that individuals making investments will be
more likely to read and study shorter, more readable documents.”
Cynthia Glassman, acting chairman of the Securities and Exchange Commission, says
that as a nonlawyer she does not speak legalese—and neither do most investors. She believes
disclosures to investors must be clear to be effective. Recipients of financial disclosures want
timely, complete, and useful information that is readily understandable. To make a point of the
importance of clear disclosures, Glassman offers the following example:
Disclosure regarding a mutual fund: No salesperson, dealer, or any other person has been
authorized to give any information or to make any representations, other than those contained
herein, in connection with the offer contained herein and, if given or made, such other
information or representations must not be relied on as having been authorized by the fund, the
fund’s investment adviser, or the fund’s administrator.
Translation: You should rely only on the information contained in this document. We
have not authorized anyone to provide you with different information.
The plain language initiative is one step to communicating more effectively with
investors. Calling disclosure forms investors must read “too legislative” and overwhelming,
Glassman identifies a need for a mainstream approach. While she acknowledges the increasing
complexity of SEC rules, Glassman has called on the film and TV industries to help educate the
public on investment rules. She said TV shows such as The West Wing often convey important
civics lessons.
Glassman recognizes that often the goals of the disclosing party and the recipients differ.
Disclosing parties often view their disclosure obligations with an eye toward limiting their
potential liability, resulting in reports that are large but not necessarily helpful and informative.
XBRL tagging is one way to address this issue. In 2005, the SEC began testing financial
data-tagging technology through a program that allows reporting companies to submit their
reports using eXtensible Business Reporting Language, or XBRL, a computer language that
makes interactive financial reporting possible. When a company uses XBRL-tagged data to
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