In 1998, the Securities and Exchange Commission passed a proposal requiring the use of plain English in the filing of prospectuses. The move was an attempt by the SEC to provide greater accessibility to the documents for individual investors. While the directive was largely applauded, some companies complained that it would give them less protection against aggressive plaintiffs lawyers.
To see if the 1998 regulation had widespread impact in corporate America, CFO.com asked readability expert Mark Hochhauser to compare documents written before the SEC’s rule took effect on October 1, 1998 to more recent filings from the second quarter of 2000. Hochhauser, a psychologist and readability consultant in Golden Valley, Minnesota, uses a host of software programs to rate documents on how well they conform to key components of plain English, like word length, sentence length, and using active voice rather than passive. His A-F grading scale provides an overview of how well documents scored in individual areas.
For our sample, we selected pre- and post-rule IPO prospectuses within industries and across a range of product complexity. In all cases, the language samples were between 900 and 1300 words and included the summary and the first 3- 5 risk factors, all of which fall under the SEC’s plain English rule.
In the network-provider industry, we compared registration statements for Global Crossing Ltd.’s August 1998 offering and Genuity’s June 2000 offering. In the online auction space, we looked at eBay Inc.’s September 1998 IPO prospectus and Dovebid Inc’s August 2000 filing. To test the theory that a recent filing for a low-tech product should rate much higher than its pre-rule, high-technology oriented predecessor, we also compared Microsoft’s 1986 IPO prospectus to Krispy Kreme Doughnut’s April 2000 prospectus. Finally, we compared Ford’s 1996 proxy to its 1997 proxy to see if it indeed lived up to its objective to improve readability in its regulatory filings. (See Sidebar)
And how did they fare? Ford’s redesigned 1997 proxy scored the highest grade of any document considered, leading the pack with a B minus. Other post plain-English filings got Cs and Ds on Hochhauser’s index, versus the failing grades that older documents scored. In general, the biggest difference was that recent documents rated at least an “interesting” on the human interest scale (which is based on the number of personal pronouns used) while the older documents were uniformly deemed “dull.” However, all of the documents are considered examples of poor writing, according to the analysis. The filings were difficult or very difficult to read, at a graduate school reading level or above.
“The problem with these documents is that sentences have too many words, too many big words, and too many unfamiliar words,” said Hochhauser.
Genuity vs Global Crossing
One of the goals the test sets is to have a minimum 60 percent of sentences in active voice. Genuity surpassed this threshold with 71 percent in active voice, outstripping Global Crossing’s 56 percent score. In both of these documents, however, only 26 percent of sentences were considered “simple & normal”; far below the ideal 80 percent set forth by the test.
eBay vs DoveBid
With an average 34 words per sentence and 73 percent of sentences considered “wordy, pompous, and complicated,” eBay was not hard to beat. DoveBid, by comparison, stood out as one of the best-written in the sample. It averaged 26 words per sentence and offered “simple and normal” sentences more than half the time.
Microsoft vs. Krispy Kreme
Big words were just as prevalent in a doughnut company’s prospectus as they were in a software maker’s registration statement, according to Hochhauser’s analysis. The statements were identical in average word length and words per sentence. However, Krispy Kreme’s statement made for “very interesting” reading and was written to a slightly lower educational level than Microsoft’s, which was considered “very difficult” to read.
“The key to all of this is ‘who’s the audience?'” says Hochhauser. “If the people who read these documents have business backgrounds and are very experienced investors, the writing problems may not be too bad. However, if the audience is ‘average’ consumers, then the materials are completely inappropriate.
Specificity vs. Simplicity
Lawyers involved in writing the filings say the SEC’s full-disclosure laws and plain English requirements often create competing objectives. Cory Ravid, DoveBid CFO and an attorney, says, “The challenge is in meeting the securities laws, which require a high level of specificity, when you’re mandated to use a specific sentence structure.” Ford echoes the sentiment, noting it continues to spar with the SEC on the use of defined terms, such as “Named Executives” for “the executives named in the Summary Compensation Table on p. 20.” “We think using defined terms is plainer English than not in many respects,” says Ford corporate counsel Lou Ghilardi.
For its part, the SEC says they don’t require language to be targeted to specific educational levels. Rather, “we ask people to use language that people from another industry could understand,” says Shelley Parratt, associate director with the SEC’s division of corporate finance. She said technical jargon has diminished tremendously since 1998 and it is rare for a document to be kicked back solely for language problems.
Language experts laud the SEC’s initiative, but in some cases, they disagree with the way it is executed. The lack of formal metrics tops the list. The evaluation process at the SEC does not involve software or word- counting. Instead, industry-specific groups read the documents for a variety of criteria, including the plain English requirements, which are outlined in the Commission’s 83-page Plain English handbook. “I know a lot of people hate reducing language to numbers,” said Hochhauser, “but shouldn’t there be some way of measuring if it’s plainer than it used to be?”
David A. Jackisch, president of Fog-Free Editorial Services LLC in Madison, WI, also wants to see more accountability. “You can follow those rules and not write simply,” he said. “I don’t think they have ways of properly measuring whether it is plain English.”
Another common complaint is that little research has been done to see if investors are truly benefiting from the revised format. The SEC’s rule states: “We believe that using plain English in prospectuses will lead to a better informed securities market–a market in which investors can more easily understand the disclosure required by the federal securities laws.” However, no evidence of this has yet emerged. The SEC has had no feedback from investors on this issue, it says, and major investment relations groups like the Investment Company Institute, had no surveys available as of press time.
The attorneys interviewed for this article were skeptical that their carefully-wrought sentences have enlightened new communities of investors, at least through the regulated prospectuses. “The people who truly concentrate on the registration statements are usually the analysts and sophisticated investors,” said Sherry. “They looked at these documents for years and years and they understood them very well before plain English came along.” Adds DoveBid’s Ravid, “I don’t think this has had any impact on leveling the playing field at all.”
Meanwhile, the Plain English campaign marches on across all levels of government, with central operations housed at http://www.plainlanguage.gov . Many agencies, including the National Labor Relations Board, have issued their own language handbooks, while others use the site as a way to get readability feedback on drafted documents. And since the beginning of 1999, 15 federal documents have merited Vice- President Al Gore’s “No Gobbledygook” award.
One of the areas the SEC is expected to attack next is bond market filings. But Ford counsel Peter Sherry has his own ideas about future directions. The next SEC rule, he says, should require plain English for stockholder proposals.