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Plain English is in and legalese is out at the Securities and Exchange Commission. Chairman Christopher Cox has been telling Congress, institutional investors, and anyone who will listen that disclosure documents must be understandable to the average investor. Companies that don’t comply with this mandate may find their documents consigned to regulatory limbo until they filter out jargon and clunky sentences. The “plain English” requirement is part of the SEC’s drive to improve disclosure � especially regarding executive compensation. It applies to proxy statements, annual reports, and any required corporate disclosures. The commission’s proposed rule on this subject, published February 8, drew 17,000 comments � one of the largest responses in the agency’s 72-year history. “Empowering investors doesn’t just mean better access to information, it also means access to better information,” Cox recently told the Senate Committee on Banking, Housing and Urban Affairs. “The disclosure in some documents . . . is often so full of legal jargon and boilerplate disclosure that it can actually obscure important information.” Cox added that plain English used everyday language and the active voice. “The active voice . . . requires a definite subject to go with the predicate. That’s the only way that investors will be able to figure out who did what to whom.” As an example of what he doesn’t want to see, Cox cited a 2001 proxy from Enron Corp. It proclaimed the company’s intention to pay senior executives “effectively in a manner consistent with the stated compensation strategy of Enron, internal equity considerations, competitive practices, and the requirements of appropriate regulatory bodies.” From that sentence, Cox said scathingly, “we actually learned nothing about what Enron’s compensation strategy might be.” One business taking notice is The Coca-Cola Company. “Obviously, we want our communications to be as clear as possible for share owners to comply with SEC guidelines,” says spokesperson Charlie Sutlive. He says Coke now uses bullet points in some documents, and included a Q&A section in its last proxy statement to help shareholders understand the proxy process. Documents filed with the SEC that don’t meet the readability test will draw a comment letter from agency staff, according to SEC spokesperson John Heine. He says that both an agency attorney and an accountant scrutinize company filings for a variety of issues, including plain English. Until their concerns are satisfied � a process that may involve back-and-forth negotiations � the SEC will not approve the filing. Cox’s campaign for clarity follows a push begun by his predecessor, Arthur Levitt. In 1998 the SEC issued a final rule requiring issuers to write the cover page, summary, and risk factors section of prospectuses in plain English. According to the SEC, that rule “transformed the landscape of public offering disclosure and made prospectuses more accessible to investors.” In a subsequent rule, the SEC required a plain English summary term sheet for all cash tender offers, cash mergers, and going-private transactions. Lawyers learn to write plain English from the SEC’s “Plain English Handbook,” posted on the agency’s Web site. Its preface was written by legendary investor Warren Buffett, chairman of Berkshire Hathaway Inc. “For more than 40 years, I’ve studied the documents that public companies file. Too often, I’ve been unable to decipher just what is being said or, worse yet, had to conclude that nothing was being said,” Buffett wrote. “In some cases, moreover, I suspect that a less-than-scrupulous issuer doesn’t want us to understand a subject it feels legally obligated to touch upon.” A version of this story first appeared in Fulton County Daily Report, a sibling publication of Corporate Counsel.

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