PLAIN ENGLISH AND THE SEC
- Rules requiring plain English and related proposing or adopting releases
- Miscellaneous studies and reports
- Speeches and other public statements
Proposing Release: Pay versus Performance (April 29, 2015) This release discusses proposed amendments to Item 402 of Regulation S-K to, among other things, require a clear description of executive pay in relation to company performance.
Rule 13a-20: Plain English Presentation of Specified Information This rule requires plain English for disclosures about executive compensation; security ownership of 5%-plus beneficial owners, directors, and named executive officers; related person transactions; and corporate governance.
Rule 15d-20: Plain English Presentation of Specified Information This rule requires plain English for disclosures about executive compensation; security ownership of 5%-plus beneficial owners, directors, and named executive officers; related person transactions; and corporate governance.
Adopting Release: Executive Compensation and Related Person Disclosure (effective November 7, 2006) This release (which is the source of the Compensation Discussion & Analysis) discusses Rules 13a-20 and 15d-20 and related amendments.
Adopting Release: Asset-Backed Securities (December 22, 2004) This release discusses registration, disclosure, and reporting requirements for asset-backed securities, and states that “even the most complex structures can be described clearly and accurately without resorting to overly legalistic presentations.”
Rule 421: Presentation of Information in Prospectuses This rule requires all information in a prospectus to be written in a “clear, concise and understandable manner.” The front and back covers, the risk factors, and the summary section must be written using plain English principles for the organization, language, and design.
Adopting Release: Plain English Disclosure (effective October 1, 1998) Where it all began…this release discusses Rule 421 and related amendments.
Adopting Release: Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Investment Management Companies This release discusses new rules that, among other things, require a plain English summary of key information at the front of every mutual fund prospectus.
Guidance regarding mutual fund enhanced disclosure (June 2014) This is a summary of comments made by staff of the Division of Investment Management, including concerns about funds’ failure to explain things in plain English and “prospectus summaries” that don’t summarize.
Rule 14a-16: Internet Availability of Proxy Materials Rule 14a-16 permits public companies to provide proxy statements and annual reports online if they first provide shareholders a Notice of Internet Availability of Proxy Materials. Under subsection (g) of the rule, “the registrant must use plain English principles in the organization, language, and design of the notice.”
Adopting Release: Shareholder Choice Regarding Proxy Materials This release discusses amendments that require public companies and other soliciting persons to provide electronic access to proxy materials.
Adopting Release: Internet Availability of Proxy Materials This release discusses Rule 14a-16 and related amendments that permit public companies to voluntarily provide electronic access to proxy materials.
Adopting Release: Regulation of Takeovers and Security Holder Communications Among other things, this package of rules requires a plain English summary term sheet for all tender offers, mergers, and going-private transactions.
Adopting Release: Securities Offering Reform Among other things, this package of rules requires risk factor disclosure in annual reports on Form 10-K to be written in plain English.
Item 406 of Regulation S-K This item, which requires public companies to disclose whether they have a code of ethics for their executive officers, defines “code of ethics” to include “written standards that are reasonably designed to … promote … [f]ull, fair, accurate, timely, and understandable disclosure ….”
Adopting Release: Form CRS Relationship Summary; Amendments to Form ADV (June 5, 2019). This release discusses new Form CRS (for client relationship summary), which broker-dealers and investment advisers will be required to give to their retail clients. The adviser or broker-dealer providing Form CRS is required to “use plain English and take into consideration retail investors’ level of financial experience” when writing the relationship summary. Instruction 2 to Form CRS explains what this means.
Adopting Release: Regulation Best Interest: The Broker-Dealer Standard of Conduct (June 5, 2019). This release discusses the standard of conduct for broker-dealers (and their personnel) when dealing with retail clients. This rule requires broker-dealers “to, prior to or at the time of [a] recommendation, reasonably disclose to the retail customer, in writing, the material facts relating to the scope and terms of the relationship with the retail customer and all material conflicts of interest associated with the recommendation.” Broker-dealers are encouraged (though not required) to use plain English when crafting this disclosure.
Adopting Release: Amendments to Form ADV (July 28, 2010). These amendments require investment advisers to provide plain English narrative brochures to clients and prospective clients describing (among other things) their business practices, conflicts of interest, fees, and disciplinary history.
Spotlight on Disclosure Effectiveness This is an ongoing project, discussed in several speeches by Mary Jo White and Keith Higgins (linked below). Some of the comments the SEC has received are worth reading.
Business and Financial Disclosure Required by Regulation S-K (April 13, 2016). This concept release discusses the SEC’s history of encouraging plain English, and asks, among (many) other things, whether there are ways “to ensure that registrants [provide] meaningful, rather than boilerplate, risk factor disclosure.”
Report on Review of Disclosure Requirements in Regulation S-K (December 2013). This report, which was required by the Jumpstart Our Business Startups Act, discusses efforts to modernize and simplify Regulation S-K, including mandates that certain disclosures be in plain English.
Study Regarding Financial Literacy Among Investors (August 2012) Summarizing the findings of a study mandated by the Dodd-Frank Act, the staff notes that “investors prefer that disclosures be written in clear, concise, understandable language, using bullet points, tables, charts, and/or graphs” and “investors favor the use of a summary document containing key information about an investment product or service.”
Toward Greater Transparency: Modernizing the Securities and Exchange Commission’s Disclosure System (January, 2009) Also known as the 21st Century Disclosure Initiative, this project didn’t go very far but still comes up occasionally.
Final Report: Focus Groups about Plain English Documents (May 2008) The SEC commissioned this report from an outside research firm to get investor opinions about the then ten-year-old plain English initiative.
Final Report: Focus Groups on a Summary Mutual Fund Prospectus (May 2008) The SEC commissioned this report from an outside research firm to get investor opinions about mutual fund disclosures.
Final Report of the Advisory Committee on Improvements to Financial Reporting to the United States Securities and Exchange Commission (August 1, 2008) This report recommends, among other things, that the SEC require public companies to include an executive summary at the beginning of each annual report and quarterly report that summarizes, in plain English, the most important information about the company and provides context for the disclosures that follow.
Division of Corporation Finance, Staff Observations in the Review of Executive Compensation Disclosure (October 9, 2007) Sample quote: “[C]areful drafting consistent with plain English principles could result in a shorter, more concise and effective discussion that complies with our rules.”
Order approving the amendment of the NASD Code of Arbitration Procedure to, among other things, “simplify the rule language into plain English.” (January 24, 2007)
Results of In-Depth Investor Interviews Regarding Proposed Mutual Fund Sales Fee and Conflict of Interest Disclosure Forms (November 4, 2004) [outside agency report to the SEC].
Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited (Joint Public Statement from the SEC and PCAOB Chairs, the SEC’s Chief Accountant, and the Directors of the SEC’s Corporation Finance and Investment Management Divisions, April 21, 2020)
Sample quote: “In light of both the significance and company-specific nature of the risks discussed in this statement, we expect issuers to present these risks prominently, in plain English and discuss them with specificity.”
Sample quote: “We expect companies to provide disclosure that is tailored to their particular cybersecurity risks and incidents. As the Commission has previously stated, we ‘emphasize a company-by-company approach [to disclosure] that allows relevant and material information to be disseminated to investors without boilerplate language or static requirements while preserving completeness and comparability of information across companies.’ [footnote omitted] Companies should avoid generic cybersecurity-related disclosure and provide specific information that is useful to investors.”
Sample quote: “You should be continuously reevaluating the purpose and value of all of your funds’ disclosures. Avoid boilerplate and tailor your disclosure as appropriate for each fund. Ask yourselves regularly: What can I do to improve investors’ understanding of the fund’s strategies, risks, and costs? These features of your funds change continuously and so should your disclosures.”
Sample quote: “When developing the policies and procedures you expect the firm and its personnel to follow they will be most effective if they are as simple as possible, are explained in plain English and are intuitive to those that have to comply with them.”
Sample quote: “Judging by the page count of proxy statements following implementation of the [compensation disclosure] rules, the goal of completeness was relatively successful. One might wonder, however, whether the goal of clarity is being met.”
Amy M. Starr, Chief, Office of Capital Markets Trends, “Structured Products–Complexity and Disclosure–Do Retail Investors Really Understand What They Are Buying and What the Risks Are?” (May 14, 2015)
Sample quote: “Some have also asked what more can be done with disclosures about these structured products or other actions that will help investors better understand the risks and operation of these sometimes very complex products?”
Sample quote: “In recent years, some companies made significant changes to the presentation of their proxy statements to enhance the disclosure for investors. We want to encourage companies to make similar strides with their periodic reports — experiment with the presentation, reduce duplication and eliminate stale information that is both outdated and not required.”
Sample quote: “[I]s there a way to ensure that issuers’ disclosures are accessible to ordinary Americans, while also providing information that is important to sophisticated institutional investors? I believe there is.”
Mr. Higgins uses this speech to urge people who draft disclosure to “step up their game” by reducing repetition, focusing disclosure on the specific company rather than just duplicating what others have done, and eliminating outdated information.
Sample quote: “[W]e think . . . additional disclosures are a good thing, but we should be careful not to have too much of a good thing.”
Sample quote: “[I]nvestors have to dig through pages of legalese to obtain the key information they’re after.”
Sample quote: “We’ll be examining how to improve the way disclosure works, including tapping the full potential of today’s technology and integrating it seamlessly into our regulatory approach. That could mean fewer confusing forms, and more useful information at investors’ fingertips in a form they can really use.”
Sample quote: “At the SEC . . . we’re dead serious about plain English.”
Sample quote: “[I]f time is money, then poorly written proxy statements are wasting one of investors’ most important assets.”
Sample quote: “Disclosure can fail in either of two different ways — it can be presented clearly and understandably without being meaningful or responsive to disclosure requirements or, conversely, it can be responsive in content without being clear and understandable.”
Sample quote: “[T]he Commission is hard at work on a simplified, plain English disclosure for mutual funds that would give investors what they need to know, in a form they can use.”
Sample quote: “Christopher Cox today announced the establishment of an advisory committee that will examine the U.S. financial reporting system with the goals of reducing unnecessary complexity and making information more useful and understandable for investors.”
Sample quote: “Another of our important initiatives to benefit individual investors is our drive to improve the quality and clarity of mutual fund and 401(k) disclosure.”
Sample quote: “[T]he staff is serious about plain English and effective disclosure.”
Sample quote: “[T]he best information doesn’t always mean the most information. The best information means disclosure that is readily accessible, easily understandable, and comparable from one fund to another.”
Sample quote: “All the information in the world is of no use if no one can understand it.”
Sample quote: “The SEC is dead serious about shedding 70 years of accumulated bad habits in writing. We are well aware that our retail disclosure system has devolved into a self-serving exercise for issuers, underwriters, and their lawyers. No company that serves retail customers would seek to draw their attention to important subjects with an 80-page doorstop. Nor should we, if we are to continue to deserve our title as ‘the investor’s advocate.’”
Sample quote: “[T]he SEC is waging an all-out war on complexity.”
Sample quote: “[I]nvestors consistently have been telling us that disclosures should contain language that the average investor, not the average lawyer, can read and understand.”
Sample quote: “Write for investors, not lawyers.”
Sample quote: “[I]n order for investors to make sound decisions, the seller’s information has to be understandable, accessible, and accurate.”
Sample quote: “Very simply put, it is my perception that disclosing parties and their lawyers — be they mutual funds, broker-dealers, investment advisers, or operating companies — view their disclosure obligations with an eye toward limiting their potential liability. Thus, the disclosures that they make, while often voluminous, do not necessarily provide information in a helpful, informative manner. In contrast, the recipients want timely, complete, and useful information that is readily understandable.”
Sample quote: “It is possible that no document on Earth has committed as many sins against clear language as the prospectus. The prose trips off the tongue like peanut butter. Poetry seems to be reserved for claims about performance, and conciseness for discussions about fees.”
Sample quote: “We want documents that are meant for investors to read to be prepared so that investors can use them.”
Sample quote: “Good writing is hard work. It takes time and effort to clearly summarize complex material; but it can be done.”