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A Plain English Handbook How to create clear SEC disclosure documents By the Office of Investor Education and Assistance U.S. Securities and Exchange Commission 450 5th Street, N.W. Washington, DC 20549 August 1998 This handbook shows how you can use well-established techniques for writing in plain English to create clearer and more informative disclosure documents. We are publishing this handbook only for your general information. Of course, when drafting a document for filing with the SEC, you must make sure it meets all legal requirements. Nancy M. Smith Director, Office of Investor Acknowledgments Education and Assistance This handbook reflects the work, ideas, and generosity of many individuals and organizations at the SEC and in the private sector. At the SEC, staff in the Divisions of Corporation Finance and Investment Management, the Offices of Public Affairs and General Counsel, and the Chairman’s Office provided insightful comments. In particular, Commissioner Isaac C. Hunt Jr., Nick Balamaci, Barry Barbash, Gregg Corso, Brian Lane, Diane Sanger, Jennifer Scardino, Michael Schlein, Heidi Stam, and Tony Vertuno offered invaluable advice and guidance. Corporate officials and lawyers enthusiastically helped us to breathe life into our plain English initiatives and this handbook. The Society of Corporate Secretaries, the American Bar Association, and The Bond Market Association invited us to conduct workshops where we tested much of the information in the handbook. Kathleen Gibson, Peggy Foran, Susan Wolf, Bruce Bennett, Jim McKenzie, Jeff Klauder, Fred Green, Mark Howard, Pierre de Saint Phalle, Richard M. Phillips, and Alan J. Davis contributed mightily to our efforts. Special thanks to Warren Buffett for his support and preface, to Ken Morris of Lightbulb Press, and to the talented staff at Siegel & Gale. I am especially grateful to the staff of my office for giving me the time and support I needed to work on the handbook. a plain english handbook Three people poured their hearts and minds into this handbook from the start: Ann Wallace, from the Division of Corporation Finance; Carolyn Miller, formerly of Siegel & Gale and now with the SEC; and William Lutz, author and Professor of English at Rutgers University. All of the credit and none of the blame goes to them. And finally, many thanks to Chairman Arthur Levitt, who made it all possible by putting plain English at the top of his agenda so that investors might better understand their investments. • a plain english handbook Table of Contents Preface by Warren E. Buffett 1 Introduction by Arthur Levitt, Chairman 3 U.S. Securities and Exchange Commission Chapter 1 What Is a “Plain English” Document? 5 Chapter 2 Getting Started 7 Chapter 3 Knowing Your Audience 9 Chapter 4 Knowing the Information You Need to Disclose 11 Chapter 5 Reorganizing the Document 15 Chapter 6 Writing in Plain English 17 Chapter 7 Designing the Document 37 Chapter 8 Time-Saving Tips 55 Chapter 9 Using Readability Formulas and Style Checkers 57 Chapter 10 Evaluating the Document 59 Chapter 11 Reading List 61 Chapter 12 Keeping in Touch with Us 63 Appendix A Plain English at a Glance 65 The SEC’s Plain English Rules—an Excerpt 66 Appendix B Plain English Examples 69 “Before” and “After” Filings with Notes 70 a plain english handbook a plain english handbook by Warren E. Buffett Preface This handbook, and Chairman Levitt’s whole drive to encourage “plain English” in disclosure documents, are good news for me. For more than forty years, I’ve studied the documents that public companies file. Too often, I’ve been unable to decipher just what is being said or, worse yet, had to conclude that nothing was being said. If corporate lawyers and their clients follow the advice in this handbook, my life is going to become much easier. There are several possible explanations as to why I and others some­ times stumble over an accounting note or indenture description. Maybe we simply don’t have the technical knowledge to grasp what the writer wishes to convey. Or perhaps the writer doesn’t understand what he or she is talking about. In some cases, moreover, I suspect that a less-than­ scrupulous issuer doesn’t want us to understand a subject it feels legally obligated to touch upon. Perhaps the most common problem, however, is that a well-intentioned and informed writer simply fails to get the message across to an intelligent, interested reader. In that case, stilted jargon and complex constructions are usually the villains. This handbook tells you how to free yourself of those impediments to effective communication. Write as this handbook instructs you and you will be amazed at how much smarter your readers will think you have become. a plain english handbook 1 One unoriginal but useful tip: Write with a specific person in mind. When writing Berkshire Hathaway’s annual report, I pretend that I’m talking to my sisters. I have no trouble picturing them: Though highly intelligent, they are not experts in accounting or finance. They will understand plain English, but jargon may puzzle them. My goal is simply to give them the information I would wish them to supply me if our positions were reversed. To succeed, I don’t need to be Shakespeare; I must, though, have a sincere desire to inform. No siblings to write to? Borrow mine: Just begin with “Dear Doris and Bertie.” • 2 a plain english handbook by Arthur Levitt Chairman, U.S. Securities Introduction and Exchange Commission Investors need to read and understand disclosure documents to benefit fully from the protections offered by our federal securities laws. Because many investors are neither lawyers, accountants, nor investment bankers, we need to start writing disclosure documents in a language investors can understand: plain English. The shift to plain English requires a new style of thinking and writing, whether you work at a company, a law firm, or the U.S. Securities and Exchange Commission. We must question whether the documents we are used to writing highlight the important information investors need to make informed decisions. The legalese and jargon of the past must give way to everyday words that communicate complex information clearly. The good news is that more and more companies and lawyers are using plain English and filing documents with the SEC that others can study, use, and improve upon. With the SEC’s plain English rules in place, every prospectus will have its cover page, summary, and risk factors in plain English. The benefits of plain English abound. Investors will be more likely to understand what they are buying and to make informed judgments about whether they should hold or sell their investments. Brokers and investment advisers can make better recommendations to their clients if they can read and understand these documents quickly and easily. a plain english handbook 3 Companies that communicate successfully with their investors form stronger relationships with them. These companies save the costs of explaining legalese and dealing with confused and sometimes angry investors. Lawyers reviewing plain English documents catch and correct mistakes more easily. Many companies have switched to plain English because it’s a good business decision. They see the value of communi­ cating with their investors rather than sending them impenetrable documents. And as we depend more and more on the Internet and electronic delivery of documents, plain English versions will be easier to read electronically than legalese. The SEC’s staff has created this handbook to help speed and smooth the transition to plain English. It includes proven tips from those in the private sector who have already created plain English disclosure documents. This handbook reflects their substantial contributions and those of highly regarded experts in the field who were our consultants on this project, Dr. William Lutz at Rutgers University and the firm of Siegel & Gale in New York City. But I hasten to add that the SEC has not cornered the market on plain English advice. Our rules and communications need as strong a dose of plain English as any disclosure document. This handbook gives you some ideas on what has worked for others, but use whatever works for you. No matter what route you take to plain English, we want you to produce documents that fulfill the promise of our securities laws. I urge you —in long and short documents, in prospectuses and shareholder reports—to speak to investors in words they can understand. Tell them plainly what they need to know to make intelligent investment decisions. • 4 a plain english handbook 1 What Is a “Plain English” Document? We’ll start by dispelling a common misconception about plain English writing. It does not mean deleting complex information to make the document easier to understand. For investors to make informed decisions, disclosure documents must impart complex information. Using plain English assures the orderly and clear presentation of complex information so that investors have the best possible chance of understanding it. Plain English means analyzing and deciding what information investors need to make informed decisions, before words, sentences, or paragraphs are considered. A plain English document uses words economically and at a level the audience can understand. Its sentence structure is tight. Its tone is welcoming and direct. Its design is visually appealing. A plain English document is easy to read and looks like it’s meant to be read. a plain english handbook 5 This handbook’s purpose This handbook gives you practical tips on how to create plain English documents. All of these were born of experience. They come from experts and those who have already written or rewritten their docu­ ments in plain English. As with all the advice in this handbook, feel free to tailor these tips to your schedule, your document, and your budget. Not all of the tips will apply to everyone or to every document. Pick and choose the ones that make sense for you. Some of our tips cover very basic mechanical issues, like how to photo­ copy your working draft. We’ve included them because they were learned the hard way and have saved people time, money, and aggrava­ tion. You’ll see them listed in Chapter 8, titled “Time-Saving Tips.” This handbook is by no means the last word on plain English. We expect to change it and add more tips as we learn more about writing securities documents in plain English. So please keep notes on your experiences and copies of your original and rewritten language. We want to hear from you and include your tips and rewrites in the next edition. Finally, we encourage you to give this handbook out freely. It is not copyrighted, so you can photocopy it without fear of penalty. • 6 a plain english handbook 2 Getting Started Assemble the team or move ahead on your own As with a lot of things in life, it’s the preparation that often determines the success or failure of an effort to write documents in plain English. Many of you routinely select a team to think and talk about how to write a document from scratch or rewrite an existing document. Or you may do it on your own. In that case, rest assured that one person can do it alone. The list below describes the types of people who have participated in successful plain English teams. We’re not suggesting that you need to select everyone listed. Some will not apply to your company or your situation. The people you select, and the point at which you involve them in your plain English project, will depend on your document, your schedule, and your budget. • A team leader who has the authority to make decisions that keep the project moving forward and bring it to a successful conclusion. (More than one plain English project has faltered because the team leader has not had this level of authority.) The team leader may be a company’s or an underwriter’s lawyer. • A lead writer who ensures the document uses a logical structure and simple, clear language. If more than one person is drafting sections of the document, the lead writer makes sure the final draft has a consis­ tent tone and the individual parts form a coherent whole. • Lawyers for the company or the underwriter who know what informa­ tion must be included and why. a plain english handbook 7 • An investor relations expert who knows firsthand the financial sophis­ tication of your investors. Investor relations people know which ques­ tions investors typically ask and where past disclosure documents have failed to make information clear. • A compliance officer who can lend guidance to the writer and who knows, along with your lawyers, what information must be included. • A production and operations person who understands the mechanics and costs of printing and mailing your document, so that your improved document doesn’t get ahead of your in-house capabilities or budget. • A marketing person who may have market survey research or polls on your investors. Also, the marketing department is usually attuned to the terminology that your investors can readily understand. • An information designer who is a graphic designer trained to work closely with the writers and to think about how to present complex information visually. Select documents You may want to consider these issues as you start writing in plain English: • How long is the document? • Will you write all of it, or only sections of it, in plain English? • How much time do you have before you need to file your document? You will also want to gather and distribute other documents that your company has written for investors. It’s likely that your company has already used plain English in its glossy annual reports and other com­ munications prepared especially for investors. These documents may save you time by showing you the type of language your company is already comfortable using. • 8 a plain english handbook 3 Knowing Your Audience Knowing your audience is the most important step in assuring that your document is understandable to your current or prospective investors. To write understandable documents, you need to gauge the financial sophistication of your investors. Through polls and other market survey research tools, some companies know the demographics of their investors well. Other companies rely on their investor relations staff or their underwriters to describe who has bought, or is likely to buy, their securities. Using whatever information is available, you can create a profile of your investors or prospective investors based on the following questions: • What are their demographics—age, income, level of education, and job experience? • How familiar are they with investments and financial terminology? • What investment concepts can you safely assume they understand? • How will they read the document for the first time? Will they read it straight through or skip around to the sections that interest them? • Will they read your document and your competitors’ side by side? • How will they use the document while they own the security? What information will they be looking for later, and is it easy to find? a plain english handbook 9 Your investors or prospective investors may include individuals and institutions with varying degrees of financial sophistication. While your audience will include analysts and other industry experts, you may want to keep in mind that your least sophisticated investors have the greatest need for a disclosure document they can understand. Some companies have faced the differing needs of their investors and other audiences by making basic educational information visually distinctive from the rest of the text so that sophisticated investors can easily recognize and scan it. Once you’ve drawn a profile of your investors, keep it constantly in mind. Some writers keep a photo of a typical investor to make sure they don’t lose sight of their readers. After analyzing who your investors are, you can turn to the document “One must consider also the audience...the reader you want to write or rewrite. • is the judge.” Aristotle Rhetoric 10 a plain english handbook 4 Knowing the Information You Need to Disclose The steps outlined in this section have been used successfully by others who have written disclosure documents in plain English. As we said earlier, feel free to tailor these steps to your own schedule and team. This is one approach if you are rewriting an existing document, but others may work equally well. For time-saving tips on how to Read and outline the current document outline and reorganize your Read the entire document once without making any notes or comments document, read Chapter 8 on on the text. This should give you a general understanding of the page 55. information covered in the document and make your next read more productive. When you read it the second time, make notes on what information is covered and any questions you have. Your notes will also help you to assess if information flows through your document in a logical order. As you read, consider the following: • Will the investors understand the language? • Does the document highlight information that is important to investors? • Is any important information missing? • Does the document include information that is not legally required and will not help investors make informed decisions? a plain english handbook 11 Meet to resolve questions Meet with the authors of the original document or others who under­ stand it and any members of the team who can help to answer the questions you wrote in the margins. Besides the obvious reason for the meeting, another more important goal is to question the need for everything that appears in the document. “Because it’s always been there” is not reason enough to keep it in your draft. Since much of the language in these documents is recycled from older (or another company’s) documents, often no one knows who initially wrote it or why it is needed now. If you’ve done your legal research and no one knows why the information is important or required, consider taking it out. Eliminate redundant information “Writers must therefore Question the need for repeating any information. Reading the same constantly ask: What am I trying to say? material two or three times can bore and even trouble readers. Most Surprisingly often they readers skip over paragraphs if they think they’ve read them before. don’t know. They must If you cut down on repetitious paragraphs or sentences, you’ll not only look at what they have written and ask: earn the gratitude of your reader, you’ll reduce printing and mailing Have I said it?” costs. William Zinsser On Writing Well Discuss the cover page and the summary A cover page should be an introduction, an inviting entryway into your document, giving investors some key facts about your offering, but not telling everything all at once. If it looks dense and overgrown with thorny details, no one will want to pick it up and start reading. If it looks like a legal document written by lawyers and for lawyers, many investors will not even attempt to read it. To create an inviting cover page, you’ll need to strip away much of what is conventionally placed there, but which is not required. 12 a plain english handbook As you review your cover page, question why each item of information is there. It may be important, but does it have to be on the cover page? You usually have a substantial document following the cover page—let some of those other pages carry the information load in logical order. What would be helpful for investors to see on this page? Look through your investors’ eyes and you’ll make better decisions about where to place information. The same goes for the summary. A summary should orient the reader, highlighting the most important points that are presented in greater detail in the prospectus. Many summaries now seem as long as the document itself and consist merely of paragraphs copied straight from the body of the document. Use defined terms sparingly Although customary, introducing defined terms on the cover page and in the summary discourages many readers from getting beyond the first pages. Overwhelmed with memorizing a new and unnatural vocabulary, and bothered by constantly having to flip back and hunt for the first time a defined term’s definition appears, many an investor will not stick with the document. One plain English expert has advised, don’t let a shortcut for the writer become a roadblock for the reader. • a plain english handbook 13 14 a plain english handbook