The Word from the Securities and Exchange Commission: Put It in Plain English
By George Hathaway and Kathleen Gibson
Arthur Levitt, Jr., Chairman of the United States Securities and Exchange Commission, promotes plain English. And when the leadership of an organization promotes plain English, the organization begins to practice plain English. In the three years that Levitt has chaired the SEC, the SEC has begun an initiative to have public companies draft plain English documents in several types of offerings of their securities. Initial examples are mutual fund prospectuses and a joint proxy statement/prospectus.
Mutual Fund Prospectuses
In an October 1994 speech to the National Press Club in Washington, D.C., Levitt asked the mutual-fund industry to clarify the prospectuses that the funds send out to customers. Levitt challenged the industry to boil down the essentials to a one-page summary that would preface the traditional prospectus. The hope was that the industry would come up with something the SEC, lawyers, courts, and state regulators could live with-and investors could better understand. So at the urging of the SEC and the Investment Company Institute, the sponsors of eight funds-including BankAmerica, Dreyfus, Fidelity, and Vanguard-now send you clear language on key points about investing in the fund. Called profile prospectuses, the four-to six-page brochures are sent to potential investors along with a standard prospectus. The profile concisely covers a fund's goals, investment strategies, risk, and expenses, and seven other topics. It also includes a bar chart that shows the fund's long-term performance.
Joint Proxy Statement/Prospectus
To further promote plain English, the SEC has set up a plain-English pilot program in the Division of Corporation Finance under Ann Wallace, Special Counsel to the Director of the Division of Corporation Finance, and assisted by Nancy Smith, Director of the Office of Investor Education and Assistance. This program encourages companies to use simplified and readable English in their disclosure documents to investors, in exchange for expedited staff review of their filings. Staff comments are given in plain English. In April 1996, when the SEC asked for volunteers to design plain-English disclosure documents, Bell Atlantic and NYNEX quickly stepped forward. In September 1996, they mailed to stockholders what is probably the first plain-English joint proxy statement. See Figures 1-3 on pages 1315-1317 for before-and-after examples.
According to Kathleen Gibson, securities counsel at Bell Atlantic:
"About 70 percent of our companies' shareholders are individual investors, so it made sense to try. We felt we could experiment in the summary section of the document because all of the detailed information is still in the back for those who care to get into the nitty-gritty details. Furthermore, the SEC told us that they would expedite their review process if we let them get involved. Nevertheless, initially we had the same concerns raised by others in the financial industry-whether plain English would simplify the documents so much that disclosure would be compromised, increasing the company's liability. Happily, that was not the case. In many ways we reduced our liability because we have created a document that is much clearer and less ambiguous. In the end, these plain English regulations should be better for business because they are targeted at the people we are trying to serve-our shareholders."
Chairman Levitt, in a September 9, 1996 speech before the North American State Securities Administrators conference, said:
"Although lawyers get most of the blame for creating unreadable documents, today they have earned my deep appreciation for enthusiastically leading the charge for plain English. In particular, I'd like to acknowledge the leadership and vision of Kathleen M. Gibson, Bell Atlantic's securities counsel, and her colleague at NYNEX, Paul D. McConville. N. Jeffrey Klauder and James W. McKenzie, Jr., at Morgan, Lewis & Bockius and Frederick S. Green at Weil, Gotshal & Manges supplied their goodwill and excellent writing skills. These lawyers are the first, but certainly will not be the last, to set a standard for others to follow and to improve upon . . . .
This is a victory for investors, for public companies, and for state and federal regulators-to say nothing of the English language. As you examine the cover page and summary of the proxy statement and prospectus for Bell Atlantic and NYNEX, you should notice the following hallmarks of plain English: everyday language; active voice; personal pronouns; shorter sentences; a 'questions and answers' format; a straightforward tone; more white space; and double columns of text that make it easier to read. We still have much to accomplish, but I'm confident that we are well on our way to creating a new generation of disclosure documents, documents that investors can read and understand."
Plain English Handbook
The SEC's pilot program in the Division of Corporation Finance continues. The staff is currently working with GE Capital, Baltimore Gas and Electric, US West, and the SCANA Corporation on other types of disclosure documents. As for mutual fund companies, USAA has volunteered to write its entire prospectus in plain English. And the SEC is encouraging other companies to participate. Those interested should contact the Division of Corporation Finance.
This fall, with the help of volunteers from the pilot program, the SEC will publish a handbook on how to write disclosure documents in plain English. To promote the handbook, the SEC will convene workshops with a number of groups, including the American Society of Corporate Secretaries and the American Bar Association. Finally, the SEC is drafting a rule that will require that prospectuses have cover pages, summaries, and risk factors written in plain English.
Figure 3-Examples of Plain English Revisions in Summary of Joint Proxy Statement
"The Merger is expected to qualify as a pooling of interests for accounting and financial reporting purposes."
"Bell Atlantic and NYNEX are each subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission."
"The Merger has been structured to qualify as a tax-free reorganization under Section 358 of the Internal Revenue Code of 1986, as amended (the "Code"). It is a condition to the obligations of each of NYNEX and Bell Atlantic under the Merger Agreement that Bell Atlantic receive an opinion from Morgan, Lewis & Bockius, LLP (special counsel to Bell Atlantic) and that NYNEX receive an opinion from Weil, Gotshal & Manges, LLP (special counsel to NYNEX) to the effect that no gain or loss will be recognized by Bell Atlantic or NYNEX, as the case may be, or their respective stockholders in connection with the Merger (other than with respect to cash received in lieu of fractional shares by holders of NYNEX Common Stock or the payment of any New York State or City real property transfer or gains taxes by NYNEX on behalf of its stockholders)."
"Upon consummation of the Merger, each share of NYNEX Common Stock issued and outstanding immediately before the Effective Time (excluding those held in the treasury of NYNEX and those owned by Bell Atlantic), without any action on the part of the holder thereof, will be converted into the right to receive 0.768 of a share of Bell Atlantic Common Stock."
"No person has been authorized to give any information or make any representation other than those contained or incorporated by reference in this Joint Proxy Statement/Prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized."
"All documents filed by Bell Atlantic or NYNEX pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Joint Proxy Statement/Prospectus and prior to the Special Meetings shall be deemed to be incorporated by reference into this Joint Proxy Statement/Prospectus and to be a part hereof from the date of filing of such documents."
"We expect the merger to qualify as a pooling of interests, which means that we will treat our companies as if they had always been combined for accounting and financial reporting purposes."
"Bell Atlantic and NYNEX file annual, quarterly and special reports, proxy statements and other information with the SEC."
"We have structured the merger so that neither Bell Atlantic, NYNEX nor our stockholders will recognize any gain or loss for federal income tax purposes in the merger (except for tax payable because of cash received instead of fractional shares by NYNEX stockholders and the payment of any New York State or City real property transfer taxes by NYNEX on behalf of its stockholders). We have conditioned the merger on our receipt of legal opinions that such is the case."
"As a result of the merger, NYNEX stockholders will receive 0.768 of a share of Bell Atlantic common stock for each share of common stock that they own." "We have not authorized anyone to provide you with information that is different from what is contained in this Joint Proxy Statement/Prospectus." "We are incorporating by reference additional documents that we file with the SEC between the date of this Joint Proxy Statement/Prospectus and the dates of the Special Meetings of our stockholders."
"Plain Language" is a regular feature of the Michigan Bar Journal, edited by Joseph Kimble for the State Bar's Plain English Committee. The assistant editor is George Hathaway, chair of the Committee. The Committee seeks to improve the clarity of legal writing and the public opinion of lawyers by eliminating legalese. Want to contribute a plain English article? Contact Prof. Kimble at Thomas Cooley Law School, P.O. Box 13038, Lansing, MI 48901. For information about the Plain English Committee, see our website. George Hathaway is a senior real estate attorney at the Detroit Edison Company and chair of the Plain English Committee of the State Bar of Michigan.