Imagine arriving at the hospital by ambulance with your father, who is experiencing severe shortness of breath. As paramedics speed him into the emergency room, you try to make sense of highly technical medical jargon. Paramedics, nurses, and doctors communicate in “code,” using precise terms to swap information vital to your father’s quick treatment. Once that treatment begins, your father’s primary-care physician fills you in on what is happening in layman’s terms.
Nobody questions the need for medical specialists to communicate in technical terminology to help patients in crisis. In fact, were they to take time for “plain English” for the benefit of relatives, they could lose patients through unclear, incomplete, or imprecise communication. Similarly, the Securities and Exchange Commission, by passing its new Plain English Rule for corporate and mutual fund prospectuses, is placing corporations at significant risk through misplaced advocacy for layman investors.
The Plain English Rule requires the cover sheet, summary, and risk-factor sections of prospectuses to be written in plain English, using the active voice, everyday language, tabular and bullet-point summaries, and so on. In theory, the rule benefits investors by reducing the apparent gobbledygook in investment documents. But it is founded on the fallacy that investors read these documents.
CFOs know that financial analysts, investment publications, bankers, and attorneys are the professionals that take time to comb through prospectuses. In fact, investors depend on these primary readers to evaluate corporate or mutual fund performance on several measures and pass along their judgments. There is a genuine danger that prospectus writers, in moving from language structured with hair-splitting precision to plain language, will confuse these primary readers with misstatements or omissions, leading to invalid investment recommendations and higher numbers of investor lawsuits.
How can the SEC help its primary readers analyze prospectuses more quickly and accurately? It can do so in three ways:
The fallacy of the Plain English Rule is the phantom investor readership that it benefits. Fixing sections of a prospectus that investors do not read is like giving CPR to a man who is merely short of breath. Both initiatives are well intentioned, but they have the potential to cause new problems rather than solving existing ones.
Attorney Gabor Garai is a managing partner of the Boston office of Epstein Becker & Green, P.C.