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Where The Stock Market Is Heading
This Fall Isnt Exactly Clear, But Investment
Prospectuses Should Be
CCH Outlines the SECs 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 CCHs 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."
THE PLAIN ENGLISH RULE
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
- Complex information copied directly from legal
documents without any clear explanation
- Repetitive disclosures that just make the
document longer without giving more useful
"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. "Dont use
200 words when 50 will suffice. Dont clutter
documents with ambiguous phrases and never-ending
paragraphs. Dont bury the single-most important
point your audience needs to understand."
CLEANING UP THE LANGUAGE
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
the present time
due to the fact that
during such time as
for the duration of
in the event that
notwithstanding the fact that
with reference to
although; even if
under; in accordance with
"Some legalisms cant 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
Securities Disclosures in Plain English
includes before-and-after examples showing how plain
English can clean up a prospectus:
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 employees 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
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
corporations repurchase rights will be
considered to have proportionally lapsed over a
five-year period starting five years after the
WILL IT WORK?
While investors are eager to see the new rule in
action, companies that don't comply may not be. Most
likely, those that dont follow the rule will not
have the advantage of expedited approval of their
documents. Its even possible that the SEC might
return filings that dont comply, or publicize the
fact that certain companies havent 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 whos considering two different mutual
funds, for example, and receives one prospectus
thats in plain English and one thats not is
going to better understand the one in plain English. And,
that could influence the investors decision."
ABOUT CCH INCORPORATED
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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