SEC Issues Plain English Disclosure Proposals and Draft Handbook, January 1997

Washington, DC, January 16, 1997 - The Securities and Exchange Commission just issued for public comment proposed rule amendments to require all registrants, including investment companies, to use plain English principles in writing, among other things, the front and back cover pages and the summary of prospectuses. Specifically, the Commission has proposed amendments to Rules 421 and 461 under the Securities Act of 1933, to Regulation S-Kand to various forms under the Securities Act. In addition, the Commission also has issued a draft plain English handbook "to provide practical tips on how to create plain English documents." Comments are due to the Commission on the rule proposals and the draft handbook by March 24, 1997.

Set forth below is a brief summary of the proposed rule amendments regarding plain English disclosure.

Rule 421 Under the Securities Act
The Commission has proposed a new provision under Rule 421 under the Securities Act of 1933, paragraph (d), which would specify six minimum plain English writing principles that public companies and mutual funds should use in drafting the front and back cover pages, and the summary section if any, included in the prospectus. These principles are:

voice;
sentences;
concrete, everyday words;
presentation or "bullet" list for complex material, whenever possible;
legal jargon, or highly technical business terms; and
multiple negatives.

In addition, the Commission has proposed to expand Rule 421(b) to provide guidance on the minimum requirements to meet the current provision for clear, concise and understandable disclosure in the prospectus. Specifically, Rule 421(b) would state that:

must be presented in clear, concise paragraphs and sentences. If possible, information should be presented in short explanatory sentences and "bullet" lists;
and subheading titles must describe specifically the information included in the section;
that are not clear from the context generally should be defined in a glossary or other section of the document. Glossaries are recommended where they facilitate understanding of the disclosure. Frequent reliance on glossaries or defined terms as the primary means of explaining information in the body of the prospectus should be avoided; and
and highly technical business terminology should be avoided.

Rule 461 Under the Securities Act
Among the factors that the staff currently considers pursuant to Rule 461 under the Securities Act when determining whether to accelerate the effectiveness of a registration statement is the clarity of the disclosure. The proposal would amend paragraph (b)(1) of that rule to permit the staff additionally to refuse to accelerate a registration statement when it has not been drafted in plain English.