"Plain English and the U.S. Securities Markets" Remarks By Isaac C. Hunt, Jr., Commissioner, U.S. Securities and Exchange Commission The Plain English Campaign's 5th International Conference London, England July 17, 1997 Good afternoon. These are heady days for many reasons. Today is the first day of the British Open, and I see that Britain is experiencing Tiger-mania. Tiger Woods has taken the game of golf to a new and exciting level. This young man drives the ball over 300 yards, routinely reaches par 5 greens in 2, and his putts are as smooth as silk. Mr. Woods has many remarkable gifts -- mental toughness, a flare for the dramatic, and a smile that makes you want to cheer. Mr. Woods has also done quite well financially, and I imagine that some of his money is invested in the U.S. stock market. This is the same stock market where the Plain English movement is starting to take hold. This, of course, is the other reason these are heady days. The plain English movement in our capital markets is a profound cultural change that we are trying to foster at the SEC. Today, I thought I'd bring you up to date on the progress we've made and our plans for the future. Over the past several decades, many of us have lost sight of the fact that the disclosure documents that are filed with the SEC every year are not only liability documents -- but are intended to be one of the primary ways that the corporate community communicates with investors. The marketplace has become so complex. Corporate transactions and financial instruments are more complex. And, I am well aware that SEC regulations are not a shining example of simplicity. Given these realities, it's understandable that those persons who prepare corporate disclosure documents often don't ask themselves -- who is our intended reader? What percentage of the company's shareholders are retail investors versus institutional investors? What will investors need to know to make informed investment decisions? * * * * * Each of us must accept some of the blame for the old way of doing business. However, we also can be proud of the progress we're making in improving corporate disclosure documents. As you know, we at the SEC, under the leadership of Chairman Arthur Levitt, are engaged in a campaign to change the corporate culture in America. We want documents that are meant for investors to read to be prepared so that investors can use them. This is the reason we are promoting the use of plain English. As Chairman Levitt has said many times, "Disclosure is not disclosure if it does not communicate." This is the reason why the Commission recently proposed a plain English rule that would apply to certain sections of a prospectus. This proposal is part of our continuing effort to bring the protection that the U.S. securities laws promise to many more investors. The proposed plain English rule would apply to all prospectuses. It would require issuers to prepare the cover page, summary and risk factors sections using plain English principles. The required disclosures would have to avoid legal jargon and highly technical business terms, use everyday words and short sentences. The design of the sections may include pictures, charts, graphs and other design elements so long as the required information is presented clearly. Our proposal also would add a note to the present requirement that the information in a prospectus should be presented in a clear, concise and understandable fashion. Overly complex presentations will be out. Vague "boilerplate" explanations that are imprecise will be out. And complex information copied directly from other legal documents will be gone. Let me state the obvious: Good writing is hard work. It takes time and effort to clearly summarize complex material; but it can be done. Let me give you an example. A few months ago, the Commission adopted rules that would require better disclosure of derivative investments. These rules covered many complex areas, including complicated financial products, accounting, and market sensitivity analysis. Nevertheless, the Commission document explaining the rules is an excellent example of good writing. If I were still teaching, I would have given the accountants who prepared the document an "A." The intended audience was other accountants and corporate lawyers, -- and the SEC staff wrote the document with these persons in mind. After working through the substance of the new requirements and putting them down on paper, the staff started the process of presenting the information in as clear a fashion as possible. They had plain English consultants, who knew nothing about the subject, read the drafts and make suggestions on how it could be improved. They wrote and rewrote. I'm sure the corporate community appreciated the extra effort that went into the project. Along with proposing the plain English rule, the SEC issued a draft of its "Plain English Handbook." It was released in draft form to encourage the public to review it and send us suggestions on how it can be improved. In the Handbook's introduction, Chairman Levitt appropriately points out that: Whether you work at a company, law firm, or the SEC, the shift to plain English requires a new style of thinking and writing. We must question whether the documents we are used to writing highlight the important information investors need to make informed decisions. The legalese and jargon of the past must give way to everyday words that communicate complex information clearly. The investing public is greeting the SEC's efforts with open arms. In addition, public companies who commented on the plain English proposals overwhelmingly support our efforts. These companies believe that it simply makes good business sense to communicate with their investors and potential investors in a straightforward and clear manner. This is the approach that they take in their annual reports, and they would like to see the same approach taken with respect to their prospectuses, proxies and other documents. Unfortunately, there has been some resistance from my own profession -- the lawyers. Some members of the bar have expressed concern that the SEC's efforts to mandate a particular style of writing may be too ambitious. They make the following argument: Securities professionals often must describe complex business transactions and agreements without losing crucial nuances. And, not all complex concepts can be explained in simple language. Drafters of prospectuses and other disclosure documents may have developed the legal and highly technical business terminology that they use because simpler, everyday terminology did not convey the appropriate meaning. In some case, only the exact language of the relevant agreement conveys the meaning. Therefore, some lawyers argue, for liability purposes, issuers may still prefer to have the exact language in the disclosure document rather than a plainer, but less exact, summary. With all due respect, I strongly believe that the practicing bar's concern of increased legal liability is misplaced. I would like to emphasize that no one seeks to reduce the substantive information that must be given to investors. Moreover, I know of no case that has held anyone liable for clearly and accurately disclosing material information to investors. In all likelihood, liability should decrease with the use of plain English because it results in less confusing disclosure. * * * * * I would also like to stress that while the SEC is promoting plain English in corporate documents, we by no means want to imply that there is no room for improvement at the SEC. I have publicly stated that we must work harder to clean up many of our rules and forms. We also should ensure that our SEC documents and regulations are clearly presented. Maybe this will cut down on the number of interpretive requests that SEC staff considers every year. * * * * * We at the SEC will continue to move forward by fostering this cultural change. We plan to march ahead and formally adopt some form of the plain English rule and the Plain English Handbook in the Fall. * * * * * In conclusion, let's remember that in preparing our corporate documents, we should keep our intended audience in mind. Sometimes that audience is other lawyers, sometimes it's institutional investors, and, at other times, it's retail investors. When your audience is retail investors, I would follow Warren Buffet's advice. He says that when he's writing Berkshire Hathaway's annual report, he pretends that he's talking to his sisters. He has no trouble picturing them: Though highly intelligent, they are not experts in accounting or finance. They will understand plain English but not legal jargon. If you don't have any sisters to write to, Mr. Buffet says you can borrow his. If you'd like to write to someone else -- maybe try Tiger Wood's caddie, Fluff. # # # # #