SEC Approves Plain-English Regulations for Prospectuses

The Securities and Exchange Commission on Thursday approved a rule that requires companies to replace legal jargon with plain English in mutual fund and stock and bond prospectuses.

“We need investors to understand these documents that are so critical and are those that aren’t being read now,” said SEC Chairman Arthur Levitt. The commission unanimously approved the proposal.

The new SEC style encourages use of shorter sentences, everyday language, a direct tone, an active voice and easy-to-read tables. Commission staff will review draft prospectuses filed by companies and funds and return those that lack clarity. Securities industry studies have shown that most investors don’t read the prospectuses.

The SEC rule is to go into effect Oct. 1 for documents on securities offerings, mergers and acquisitions, and limited partnerships. It will take effect for mutual fund prospectuses six months after the commission approves a separate proposal that would simplify these documents further with summaries, charts and tables. The SEC is expected to vote on this proposal, which would introduce a shortened “profile” prospectus to supplement the longer document, in the next few weeks.

The commission said it will release a plain-English handbook for company use in about six weeks. The SEC expects companies to eventually extend the use of straightforward prose to all investor documents, SEC corporation finance director Brian Lane said.

The SEC estimates that companies will have to spend about $56 million collectively in one-time expenses to translate their documents into plain English.

The Securities Industry Assn. opposed the plain-English proposal, saying company use of straightforward prose should be voluntary rather than mandatory.

“Our firms have made great strides at making financial terms and processes far easier for the average individual to understand,” said Jim Spellman, spokesman for the brokerage trade group.

He also said underwriting firms might be more susceptible to investor lawsuits if they exclude certain information in helping to prepare simplified prospectuses.

In an example of plain English released Thursday by the commission, Bell Atlantic Corp. submitted a draft merger document in November 1996 that it later converted into simpler prose. The original Bell Atlantic document said: “The Merger Agreement provides among other things for the merger of a wholly-owned subsidiary of Bell Atlantic (“Merger Subsidiary”) into Nynex, the “Merger,” with Nynex surviving the Merger as a wholly-owned subsidiary of Bell Atlantic.”

In the final version, the company wrote: “The boards of directors of Bell Atlantic Corporation and Nynex Corporation have agreed on a merger of equals designed to create one of the premier communications companies in the world. The combined company will be named Bell Atlantic Corporation and be headquartered in New York, New York.”