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Leslie Bonacum
Neil Allen

Where The Stock Market Is Heading This Fall Isn’t Exactly Clear, But Investment Prospectuses Should Be

CCH Outlines the SEC’s New Plain English Rule and What Investors Should expect

(RIVERWOODS, ILL., October 1, 1998) -- The Securities Exchange Commission's rule requiring plain English in stock and bond prospectuses goes into effect today, following a similar measure, already in effect, requiring mutual funds to provide plain-English profiles of investments. For investors who've puzzled over these documents trying to figure out if they should invest -- or if they should divest -- this comes as welcome news, according to CCH INCORPORATED, a leading provider of business and securities information.

"Right now, Americans have more money in the stock market than they have in banks," said Bryan A. Garner, author of CCH’s Securities Disclosure in Plain English book, to be published in January 1999. "Most people can understand their bank statements, but few can decipher the documents they receive about their stock market investments."


Starting today, the SEC requires companies to use plain-English principles when writing the cover page, the summary and the risk-factors section of a prospectus.

The new rule requires short sentences, everyday language, active voice and tabular presentation of complex information. And, the rule prohibits legal or business jargon and multiple negatives.

Also, the prospectus must be easy to read and must highlight information that is important to investors. Pictures, charts and graphics, for example, are encouraged to make the prospectus easier to understand.

The rule also disapproves of the following hazards:

  • Legalistic or unduly complex presentations
  • Vague boilerplate that is open to different interpretations
  • Complex information copied directly from legal documents without any clear explanation
  • Repetitive disclosures that just make the document longer without giving more useful information

"The bottom line is that the SEC is telling companies to keep it simple," explained Garner, who not only writes books on plain English, but also serves as president of LawProse, Inc., a Dallas-based company that teaches writing to attorneys. "Don’t use 200 words when 50 will suffice. Don’t clutter documents with ambiguous phrases and never-ending paragraphs. Don’t bury the single-most important point your audience needs to understand."


In Securities Disclosure in Plain English, a book designed to help corporations and their attorneys comply with the SEC ruling, Garner identifies words and phrases that investors detest and provides plain-English translations:

Legalistic Style

at the present time

due to the fact that

during such time as

for the duration of

inasmuch as

in the event that

notwithstanding the fact that

prior to

pursuant to

subsequent to

that certain

with reference to

Plain English


because; since



because; since


although; even if


under; in accordance with




"Some legalisms can’t be avoided. But corporations have to become more sensitive to their audiences," said Garner. "Legalisms that can be easily simplified are the truly off-putting phrases that make ordinary people resent the legal writing they encounter."

Securities Disclosures in Plain English includes before-and-after examples showing how plain English can clean up a prospectus:

Legalistic Style

In the event of a default by an underwriter, the standby underwriting agreement provides that, with minor exceptions, purchase commitments of the non-defaulting underwriter may be increased or the agreement may be terminated.

In the event of the employee’s death or involuntary termination prior to the tenth anniversary of the grant date, the repurchase rights of granting corporation shall be deemed to have lapsed ratably over a five-year period commencing with the fifth anniversary of the grant date.

Plain English

If an underwriter defaults, the standby underwriting agreement generally allows the non-defaulting underwriter to increase its purchase commitments or terminate the agreement.


If the employee dies or is fired within ten years of the grant, the granting corporation’s repurchase rights will be considered to have proportionally lapsed over a five-year period starting five years after the grant.


While investors are eager to see the new rule in action, companies that don't comply may not be. Most likely, those that don’t follow the rule will not have the advantage of expedited approval of their documents. It’s even possible that the SEC might return filings that don’t comply, or publicize the fact that certain companies haven’t complied.

Karen Clanton, a securities analyst for CCH and editor of Securities Disclosure in Plain English, also points out that investors can apply pressure. "An investor who’s considering two different mutual funds, for example, and receives one prospectus that’s in plain English and one that’s not is going to better understand the one in plain English. And, that could influence the investor’s decision."


CCH INCORPORATED, Riverwoods, Ill., is a leading provider of business and securities information, including Federal Securities Law and Blue Sky Law Reports. CCH also provides tax and business law information in print and electronic form for accounting, legal, health care and small business professionals. CCH is a wholly owned subsidiary of Wolters Kluwer U.S.

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