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Jan 31, 1997

Wall Street's Dragon Teeth

The SEC promotes plain English for prospectuses and proxy statements

Titters bubbled from corporate executives at a recent conference as an attorney ponderously explained the idea of writing in plain English. But with a language handbook forthcoming from the Securities and Exchange Commission, along with rules requiring plain English in the cover sheet, summary and risk factors of a prospectus, the concept of plain English filing is rapidly evolving from amusing oxymoron to a whole new way of thinking.

'We recognize that we're part of the problem,' says Nancy Smith, director of the SEC's office of investor education. 'Our regulations are certainly not models of plain English. Yet the idea behind the rules is that investors can read and understand what an investment is about. If that disclosure is not understandable, then the protections offered by the rules are not worth very much.'

Legend has it that the plain English wildfire was sparked by SEC chairman Arthur Levitt when he took office and had to transfer his investments from the stock market into mutual funds. Since opening a mutual fund prospectus, and finding he couldn't understand it, his rallying cry has been that prospectuses should start speaking a new language: the English language.

First investment managers and now corporates have submitted to the plain English revolution. Some 23 participants in the SEC's corporation finance pilot program have produced documents with plain English sections, starting with the Bell Atlantic/Nynex merger.

Plain English is like a fever, according to Ann Wallace in the SEC's division of corporation finance: 'Once you start writing in plain English, you realize it's just plain fun.' Peggy Faran, in-house counsel at ITT, calls plain English 'contagious', while Jeff Klauder, a partner with Morgan Lewis & Bockius, dubs the phenomenon 'infectious'.

Indeed the SEC's pilot program was established precisely to spread models around other companies for them to use and improve upon. Klauder, who assisted Bell Atlantic in its merger document, says plain English spread from the summary to other parts of the document, and he has already seen parts copied for other deals.

'You can blame the lawyers for a lot of turgid drafting,' Klauder admits. 'Boilerplate grows like barnacles, and lawyers are reluctant to start ripping it down.' That is one reason why plain English seems more expensive. It used to be that Klauder would hit a button on his computer, it would spit out his last deal, and he would tailor it to a new deal: 'That's faster than writing in plain English for the first time, asking tough questions like: what is it I want to say, what drives the deal, and what is most important?'

Klauder says plain English means writing something a 15-year old could understand. The top three rules are: use active voice, personal pronouns, and short, declarative sentences. 'When you get into that mindset for the cover and summary, even background sections are improved.'

Plain English doesn't mean that documents are getting any shorter. 'A plain English version brings a lot of the important information to the front, and puts it into a format that's more familiar to people not used to reading these documents,' observes Tom Vos, marketing VP at Bowne & Co, a financial printing firm. 'For now, having plain English in addition to lawyer-speak means tacking on additional pages.'

Kathy Gibson, securities counsel at Bell Atlantic, is recognized as a plain English pioneer. 'I didn't see any downside,' she says of the decision to produce the first plain English document. '70 percent of our stockholders are individuals, and we thought it would be good shareholder relations to make a document more understandable.'

Gibson estimates that it took the merger's legal team an extra 20 hours of work to do the plain English part of the proxy statement. But that paid off in two ways: a Q&A section, devised with the IR department, drastically reduced shareholder questions fielded by the company's transfer agent; and an expedited review by the SEC meant the mammoth deal could go through faster.

The SEC is winning accolades from Gibson and others for its handling of the pilot process. Within 48 hours of receiving Bell Atlantic's first draft, Wallace and Smith came up with a raft of comments - in plain English. They pointed out that, having read the summary, they had no idea why anyone would vote for the merger. They asked fundamental questions like: what are you trying to communicate? 'We never even asked that ourselves,' Gibson marvels.

Says Smith, 'Plain English, more than anything, is about rethinking what's important: what do investors need to know? And have I said it in a way they need to understand? Everybody is thinking creatively about how we can turn these documents from doorstops into pieces of writing that are actually going to be read by investors. There's a lot of value in creating a document that communicates.'

Foran first volunteered to carve out plain English documents while working for JP Morgan. Eventually she got her chance at ITT, which recently did a shelf registration prospectus. 'We did so many deals at Morgan, I could have done a plain English prospectus in my sleep,' Foran remarks. 'Then I came to ITT, and I was lucky to find very progressive business people who also thought that writing plainly and concisely in plain English was a great idea.'

Anyone can apply to join the SEC's plain English pilot program by contacting Wallace or Smith, and benefit from plain English comments in addition to a review process taking half the usual time. What's next for the plain English laboratory? Smith says the SEC would love to chew on an IPO. In the event, good luck to the lawyers who tackle plain English IPO risk factors.