SEC Adopts Plain English Disclosure Proposal, February 1998

Washington, DC, February 5, 1998 - The Securities and Exchange Commission has adopted proposed rule amendments that require all securities registrants, including investment companies, to use plain English principles in writing the cover page, summary, and risk factors sections of prospectuses. For mutual funds, the requirements will apply to the cover pages of, and the proposed risk/return summary in, prospectuses and profiles.

Investment companies must comply with the plain English rule and revised disclosure requirements for new registration statements filed on or after October 1, 1998. The Adopting Release states, however, that when the Commission acts on the proposed amendments to mutual fund disclosure requirements proposed in February 1997, it may change the date by which mutual funds must comply with the plain English requirements so that such funds may comply with all of the new requirements with one filing.

The Commission's Office of Investor Education and Assistance will issue a final version of A Plain English Handbook: How to Create Clear SEC Disclosure Documents within the next six weeks. Although the handbook will be available on the Commission's Internet site (http://www.sec.gov), the Commission suggests ordering a hard copy because certain graphic elements will not be available on the web. To order a hard copy, call 800-SEC-0330.

Rule 421 Under the Securities Act of 1933
As proposed, the Commission adopted a new paragraph (d) under Rule 421. The new provision requires investment companies and other issuers to use plain English principles in the organization, language, and design of the front parts of prospectuses. The language in the front part of prospectuses must comply substantially with the following six basic principles:

Short sentences;
Definite, concrete, everyday language;
Active voice;
Tabular presentation or bullet lists for complex material, whenever possible;
No legal jargon or highly technical business terms; and
No multiple negatives.

Rule 421(d) permits the use of pictures, logos, charts, graphs, or other design elements in prospectuses, so long as the design is not misleading and the required information is clear. It encourages the use of tables, schedules, charts and graphic illustrations of financial data that present the data in an understandable manner.

In addition to adopting Rule 421(d), the Commission amended Rule 421(b) to set out four general techniques to follow and four conventions to avoid when drafting prospectuses.

Present information in clear, concise sections, paragraphs, and sentences. Whenever possible, use short explanatory sentences and bullet lists;
Use descriptive headings and subheadings;
Avoid frequent reliance on glossaries or defined terms as the primary means of explaining information in the prospectus. Define terms in a glossary or other section of the document only if the meaning is unclear from the context. Use a glossary only if it facilitates understanding of the disclosure; and
Avoid legal and highly technical business terminology.
Drafting conventions to avoid are:
Legalistic or overly complex presentations that make the substance of the disclosure difficult to understand;
Vague boilerplate explanations that are readily subject to differing interpretations;
Complex information copied directly from legal documents without any clear and concise explanation of the provision(s); and
Repetitive disclosure that increases the size of the document, but does not enhance the quality of the information.

Rule 461 Under the Securities Act of 1933
The Commission amended Rule 461, governing acceleration of the effective date of a registration statement. As revised, Rule 461(b)(1) provides that the Commission can refuse to accelerate the effective date if a prospectus does not comply with the plain English requirements of Rule 421(d). The Adopting Release expresses the Commission's belief that concerns that the amendment could frequently delay the effective date of registration statements are unfounded. It notes that the existing procedures for granting or denying acceleration have worked well and that the Commission believes they will continue to work in implementing the plain English rule.

Rule 481 Under the Securities Act of 1933
The Commission amended Rule 481, which prescribes information (including certain legends) required in investment company registration statements. The amended rule is written in plain English. Among the other changes are:

Required legends must be written in plain English. The Adopting Release states that using all capitalized letters for the legends does not give them proper prominence but rather makes them hard to read. The rule provides examples of language that investment companies may use for some of the required legends; and
The table of contents must appear on the outside front, inside front, or outside back cover page of the prospectus. It must immediately follow the cover page in any prospectus delivered electronically.

Staff Review and Comment Process
In its comment letter on the plain English proposal, the Institute urge the Commission and its staff to avoid applying the plain English principles in a rigid or mechanical fashion. The Adopting Release states that the staff will focus on "whether you disclose material information and whether that disclosure is clear," and will not correct grammatical mistakes. The staff will issue comments in plain English and avoid requesting repetitive information.

The Adopting Release also indicates that, because a document's format and design affect its readability, the staff "will request paper copies of the plain English sections that you plan to deliver to investors." The release notes that the Commission is working to update the EDGAR system to permit the filing of an exact duplicate of the paper copy, "but this may not occur for some time." (The Commission has proposed to require mutual funds to file paper copies of profiles.)