Plain English

Has Plain English Improved Public Companies' Disclosure Statements?

In the late ‘90s, the Securities and Exchange Commission (SEC) adopted a rule that required all securities registrants to use plain English in their prospectuses. Specifically, this rule said that companies should write the cover page, summary and risk factors sections in plain English. The move to plain English was expected to be “a profound cultural change” according to Isaac C. Hunt, Jr., Commissioner, U.S. Securities and Exchange Commission. From the SEC’s viewpoint, writing in plain English means:
  • Short and concise sentences and paragraphs
  • Active voice
  • Every day language
  • Descriptive headings
  • Bullets
  • Define words in the text and avoid using glossaries
  • Limit the legal and technical writing
  • Eliminate repetition
While the concept of plain English is not new, the main purpose of plain English in SEC filings was to help the average investor understand the company so they could make informed investment decisions. Almost ten years later, the question remains: Has the advent of plain English helped investors better understand the companies they are investing in? Decide for yourself. Read the following excerpts from a few of the companies that compose the Dow Jones Industrial Average and look for plain English violations.

Honeywell International Inc. Business Overview
"Honeywell International Inc. is a diversified technology and manufacturing company, serving customers worldwide with aerospace products and services, control, sensing and security technologies for buildings, homes and industry, turbochargers, automotive products, specialty chemicals, electronic and advanced materials, and process technology for refining and petrochemicals. Honeywell was incorporated in Delaware in 1985.”
Plain English Violations:
  • Honeywell’s business overview has a fog index of 23.6.
  • The paragraph contains two sentences, one of which contains 45 words.

Merck & Co. Inc. Business Overview
“During 2006, Merck continued to execute its strategy to reclaim its leadership position in the pharmaceutical industry. This was made evident through the successful launches of five novel medicines and vaccines in areas such as cancer prevention and diabetes, the advancement of drug candidates through every phase of the Company’s pipeline and the continued success of its newer and in-line products.”
Plain English Violations:
  • Merck’s business overview has a fog index of 18.3.
  • More than 50 percent of this paragraph is written in the passive voice.
  • On average there are 30.5 words per sentence.


Alcoa Inc. Risk Factor
“The aluminum industry is highly cyclical, with prices subject to worldwide market forces of supply and demand and other influences. Prices can be volatile. Although Alcoa uses contractual arrangements with customers, as well as forward, futures and options contracts, to manage its exposure to the volatility of LME-based prices, and is product and segment diversified, Alcoa’s results of operations could be affected by material adverse changes in economic or aluminum industry conditions generally or in the markets served by Alcoa, including the transportation, building and construction, distribution, packaging, industrial gas turbine and other markets.”
Plain English Violations
  • This risk factor has a fog index of 19.7.
  • "LME-based prices" is neither an average day phrase nor is it defined in the text.
  • On average there are 31.1 words per sentence.

While companies’ filings may be clearer than before plain English came along, there is still plenty of room for improvement.



References:
1Hunt, Isaac C. (Speaker). (1997). Transcript. Plain English and the U.S. Securities Markets. Rare Book, The Plain English Campaign's 5th International Conference. London, England.
2Plain English Disclosure: Securities and Commissions Exchange. Release Nos. 33-7497; 34-39593; IC-23011 (1998).

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