Really Full Disclosure

Don't buy a new-issue stock or mutual fund without reading the prospectus. That's what all the sellers piously say. Then the prospectus turns out to be unreadable, as America's legions of new investors discover. The dense prose fights with the "full and fair disclosure" (of costs, risks, etc.) that the law requires.

Or so the watchdog Securities and Exchange Commission (SEC) worries. It has proposed rules demanding disclosure in plain English. It gives fast-track treatment to documents put into plain English now. And it offers lessons that could improve anyone's writing, including active verbs, short sentences (see below), and no multiple negatives.

Does plain English make any practical difference? Citibank thinks so. After it started using a plain-English promissory note, the number of collection lawsuits fell considerably, according to the SEC, because borrowers had an improved understanding of their obligations.

Nor did the effort to use plain English raise costs, according to two companies who tried it and liked it. They were Bell Atlantic and Nynex preparing a joint proxy statement on a $21 billion merger for 1 million stockholders.

How about saying "we" and "you," the SEC nudges, instead of the abstract "the company" and "the shareholder"? The SEC likes the cover page of a recent offering made by Berkshire Hathaway: "Warren Buffett, as Berkshire's Chairman, and Charles Munger, as Berkshire's Vice Chairman, want you to know the following (and urge you to ignore anyone telling you that these statements are `boilerplate' or unimportant)." This introduction is followed by clear warnings regarding the company's asset growth, share price, and the market for the securities.

All the SEC asks is that public companies and mutual funds write prospectus cover pages in everyday language that investors can understand on first reading. The proposed rules shift to the body of the document technical information that may be important to the offering process but is not critical for the cover. This would satisfy the legal purpose of disclosure: "to secure for potential buyers the means of understanding the intricacies of the transaction into which they are invited."

As a result of the present tortured texts, many investors may skim rather than read prospectuses, says the SEC, citing the notion that "full disclosure" is by and large a myth. Trivial points sometimes receive as much attention as material ones, burying the points that are most significant in making an informed investment decision.

"These problems are not new," says the SEC. "More than 45 years ago, Prof. Louis Loss identified prospectus readability as one of the basic problems with the registration process." We called Louis Loss, now professor emeritus, at his Harvard Law School office. Since his early days at the SEC he has written the book (now 11 volumes) on "Securities Regulation."

What about those who criticize the proposed rules on grounds that plain English is not precise enough for prospectus purposes? It's possible to write both plainly and precisely, says Professor Loss. But he's not for "The dog is under the lamp" sort of primer English. He thinks making all sentences short would be monotonous.

The SEC seems to echo him when it says plain English does not mean "dumbing down" complex information. It means writing that is not needlessly difficult to understand.

Let's call it plain good sense.

* The SEC's draft handbook on plain English may be requested at 1-800-SEC-0330; or accessed on the Internet (

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