“Investors need to read and understand disclosure documents to benefit fully from the protections offered by our federal securities laws. Because many investors are neither lawyers, accountants, nor investment bankers, we need to start writing disclosure documents in a language investors can understand: plain English.”
In 1996, the U.S Securities and Exchange Commission (SEC) launched a series of initiatives to simplify the language used in documents intended for the public. As part of a larger federal initiative toward the governmental use of plain language, the SEC’s efforts culminated in the enactment of the 2010 Plain Writing Act. This act requires all SEC documents to be written in a manner that is “clear, concise, well-organized, and follows other best practices appropriate to the subject or field or audience.”
In 1998, the SEC published its Plain English Handbook, containing guidelines to help financial institutions write prospectuses and disclosure documents in a manner that is clear and comprehensible to most investors. As virtually all investment products are fraught with risk, investors need to be well-informed as to the potential risks, rewards, and costs of a given investment product. It goes without saying that the information provided should also be comprehensive, detailed, and intelligible.
The problem, however, is that most investors find these documents to be indecipherable as they are often written in “legalese” or contain unnecessary amounts of industry jargon. The SEC’s handbook aims to remedy this situation by providing financial companies with practical tips on writing disclosure documents that are comprehensive yet readable.
Ten Lessons From the SEC Plain English Handbook
1. Reading penetrates content beyond the text
Let’s take a step back and consider what it is that we actually “read” while reading. Written content delivers the bulk of its informational payload through words and sentences. When we read, we spend most of our time deciphering information on the word and sentence level. But neither level is inseparable from the larger structural context that binds it or the marginal structures that provide it support.
While we spend most of our effort deciphering words and sentences, we also decipher meanings contained within a complex set of other factors including spatial and topical hierarchies, visual layout, typography, rhetorical nuance, tone, genre of speech (legal, casual, sales-oriented speech), and content flow. All of these factors play a significant role in structuring a reader’s end-to-end content experience. And this experience can take place within the boundaries of a single document, or across a series of related documents (i.e. marketing content, prospectus, client application, and risk disclosure).
2. Each reader approaches the text from a unique base of knowledge and experience
That each reader approaches text from a different level of comprehension may seem obvious. But considering the way most financial disclosure documents are written, such an obvious notion seems to be disregarded. When financial documents fail to engage the average investor’s comprehension level, the possibility of a misreading dramatically increases.
A reader’s personal base of knowledge serves as a context in which textual information is at once absorbed, filtered, expanded, and transformed in the course of reading. Interpretation is by nature an adaptive and transformative process. Lacking clear textual constraints, interpretation becomes increasingly transformative as it attempts to adapt to vague conditions. When it comes to conveying strictly functional information—information that is not open to multiple interpretations—the variability of the reading process is best managed through simple and clear writing.
3. Readability is determined by the efficiency of interaction between text and reader
Regardless of the size or complexity of information contained in a document, the efficiency with which a reader can decode the information is what matters most. This implies not only the ease and speed with which a reader can get through a text, but also the reader’s ability to retain and remain attentive to the information.
If a text is structured in such a way that a reader can understand the words, get through each sentence (or section) efficiently, and retain the information, then it’s conceivable that even the most complex information can be successfully conveyed. These aspects are directly connected to word choice, syntactical structure, mode of organization, and visual presentation.
4. Word choice significantly affects reading efficiency
Unfamiliar words, or familiar words used in a different context, can slow down a reader’s ability to process information. When a reader comes across either case, s/he will typically search for meaning in the surrounding context. The reader will have to re-read previous sentences or sections, or continue reading only to return to the original sentence to reposition its meaning within the proper context. This process is highly inefficient. It slows down the rate of comprehension, disrupts the flow of reading, and impedes the cognitive retention and recall process.
Let’s take a look at an example from The Street:
“NEW YORK (TheStreet) — JPMorgan initiated coverage on Boeing stock with an “overweight” rating and a $175 price target.”
What does “overweight rating” mean? Is it a good rating, or a bad one? Let’s move on to the next sentence.
“The firm said it began coverage on the aerospace company as it believes Boeing will be able to grow free cash flow by 40% by 2017. Shares of Boeing are up by 0.05% to $146.70 at the start of trading on Tuesday morning.”
Apparently, an overweight rating is positive, as Boeing’s cash flow is expected to increase. But this does not tell us what overweight means. Is the stock overweight? Does an overweight rating mean the same thing as a buy recommendation? Perhaps the confusion has to do with our more common associations with the term “overweight.”
Although “overweight” is a term commonly used in the financial industry, many investors, particularly new ones, are unfamiliar with its meaning in a financial context. Most readers associate “overweight” with health: to be overweight is to be unhealthy. Imagine reading the above sentence from this perspective. If the price of Boeing stock is currently below $175—its price target—the term “overweight” conjures up the image of a bulky stock attempting a difficult rise against the force of gravity; its own weight slowing it down or causing it to tumble.
Although this interpretation is incorrect, it is nevertheless a reasonable association. In finance, overweight refers to a situation in which an investor holds an excess of a given stock because s/he expects it to outperform other stocks in the portfolio. Overweight refers not to the stock, but to the overall “weight” of its holdings within a portfolio of stocks. Seen in this light, an “overweight” rating is a good thing.
5. Readers have deeply ingrained syntactical expectations
Most English speakers have an ingrained tendency to seek out or project subject-verb-object sentence patterns. The further a text deviates from this basic pattern, the less efficient it becomes for both reading and retention. Readers are likely to project onto it the wrong sentence structure until they are able to gradually adapt to the syntax.
Let’s take an example from the SEC handbook:
The following description of the particular terms of the Notes offered hereby (referred to in the accompanying Prospectus as the “Debt Securities”) supplements, and to the extent inconsistent therewith replaces, the description of the general terms and provisions of the Debt Securities set forth in the Prospectus, to which description reference is hereby made.
Now let’s place emphasis on the main subject-verb-object relationship:
The following description of the particular terms of the Notes offered hereby (referred to in the accompanying Prospectus as the “Debt Securities”) supplements, and to the extent inconsistent there with replaces, the description of the general terms and provisions of the Debt Securities set forth in the Prospectus, to which description reference is hereby made.
This makes it somewhat easier to read, but it still warrants revision:
This document describes the terms of these notes in greater detail than our prospectus, and may provide information that differs from our prospectus. If the information does differ from our prospectus, please rely on the information in this document.
6. Readability is also a function of design
Design serves a structural and aesthetic function. A well-designed document is one in which the structural or aesthetic function enhances the other in a balanced manner. A design can be aesthetically appealing yet poorly structured, in which case the text may be obscured. It also works the other way around—a well-structured design with bad aesthetic choices can distract or repel readers. The fundamental thing to consider, as stated in the handbook, is that “design serves the goal of communicating the information as clearly as possible.”
While design entails a very broad range of elements and strategies, the handbook focuses on five primary design elements: hierarchy or distinguishing levels of information, typography, layout, graphics, and color. As we mentioned in the first lesson (Reading encompasses every aspect of the written presentation), there’s much more to a written document than words and sentences. If tone of speech can alter the meaning of a text, then the same can be said for the aesthetic “tone” of design.
Furthermore, as design plays a dual function in structuring and enhancing text—it defines the spatial and sequential organization of information in addition to defining its sensible or aesthetic expressiveness—its role in enhancing readability is critical.
7. Simple does not mean “simplistic”
In the first chapter of the handbook, the authors set out to dispel a common misconception about writing in plain language. Plain language is not about making a text readable through the deletion of important information. It’s about simplifying complex information, not making information “simplistic” (making it appear simpler than it really is through deletion).
On the use and abuse of jargon:
Prospectuses and disclosure documents often contain jargon, which is a category of specialized terms used within a profession. Among practitioners in a specific field, jargon enhances efficiency: it serves as a form of shorthand terminology that summarizes a wide field of concepts. By summarizing a “field” of concepts, jargon presupposes a number of things: a network of related concepts, their histories and modes of use, their transformations under different contexts or circumstances, etc.
Take for example the term “arbitrage.” This simply means the simultaneous purchase and sale of an identical product in two different markets to profit from the difference in price. To a finance professional, the term arbitrage refers to a number of different scenarios: triangular arbitrage, merger arbitrage, political arbitrage, etc.; all of which involve completely different processes, histories, technologies, markets, and strategies.
But there is also another side to jargon: specialized terms not meant to summarize a large volume of concepts but to replace common terms with the intent to misdirect. For instance, a “career-change opportunity,” or a “career alternative enhancement program,” is an empowering way to say, “Hey, you’re fired!” Another classic example is former Federal Reserve Chairman Alan Greenspan’s use of “Fed-speak” to avoid addressing issues directly (hoping that his lack of clarity will either be ignored or create enough confusion to prevent unintended market jolts).
A reader who is unfamiliar with financial jargon will not be able to distinguish between the two uses of jargon as described above. As most investors are not financial professionals, it’s best to stay on the safe side and avoid using jargon altogether.
8. Readability is a form of competitive advantage
In chapter 3, “Knowing Your Audience,” the Plain English handbook bullet-points a set of questions to help create an investor profile. There is one marginal entry—marginal because it is mentioned only once in the entire handbook and appears buried near the middle of the list (note my reading bias toward “placement” in which a bullet point in the middle is not as important as a point at the beginning or end). It reads: “Will they read your document and your competitors’ side by side?”
Prospective investors will compare and contrast financial products to find one that best suits their investment goals. It’s about comparing information…or it should be. If a prospectus is written so poorly that an investor cannot understand it, it may end being misread or avoided altogether. And the company that published the indecipherable prospectus, regardless of the quality of their financial product, ends up losing.
9. Readability encourages trust
“According to the 2015 Edelman Trust Barometer, only 54% of the public trust the financial services industry. One area that causes confusion and adds to this mistrust is written communication. The entire financial services industry could increase profits, decrease lost time, and improve customer relations if they wrote more financial information in plain language. Many regulations now require “clear and conspicuous” language, but perhaps a more important reason to create written information in plain language is that clear, concise, and credible communication contributes to the bottom line and to customer satisfaction.”
It’s not difficult to understand how “written communication” in the financial industry typically “causes confusion and adds to [the current environment of] mistrust.” Think about the client’s end-to-end content experience: marketing content infused with cleverly-designed rhetoric followed by indecipherable yet critical information on risks and costs.
For example, a brokerage’s marketing material touts “state of the art electronic platform for professional traders,” reinforced by “your satisfaction is our top priority.” Both of these messages are clear: their technologies are up-to-date, implying fast and reliable execution (that’s what “state of the art” means to a trader), and the brokerage will do its best to service clients (it is their “top priority”).
A client then receives a lengthy risk disclosure. Buried in the middle of the document is a statement that reads: “Electronic trading facilities are vulnerable to temporary disruption or failure. You may experience loss of orders or order priority. Your ability to recover certain losses as a result of such disruptions is limited by the system providers, clearing firms, exchanges, and brokerage.”
I have seen what happens when technology failures (e.g. a downed server) cause clients to lose money. If the risk disclosure were clearer, there would be no need for a financial representative to spell out what this small entry in the risk disclosure means: you lost money due to a failure in our technology; you are responsible for your own loss.
So much for trust.
10. Successful content requires organizational collaboration
Last but not least, well-written financial documents require teamwork. The reason for this is that each department— marketing, investor relations, compliance, legal, design, and management—will have not only a different perspective on a product, but also a different language to express their perspective. In other words, a financial company will need to break down content silos in order to create a comprehensive and clearly written document.
Let’s take a brief detour. In finance-speak, the term “volatility” refers to rapid and sharp price fluctuations. A stock is considered volatile if its price movements make sudden and dramatic directional changes on a regular basis. Volatility may result from a scarcity of market participants, in which a few hold significantly larger amounts of capital, allowing them to move markets; or volatility can reflect conflicting market views or sudden shifts in market sentiment. Price movements, no matter how smooth or volatile, are always comprised of heterogeneous perspectives and actions. This is analogous to the process of constructing and conveying product identity.
The process of putting together and presenting an investment product involves multiple efforts; multiple angles of approach. One department’s concern may not be shared by another. Yet, every department is working together to develop a product offering that appears seamless, linear, and singular. Without a coordinated approach to “smooth out” the perspectives on a given product and the language used to describe it, then the end-to-end product experience from a content standpoint may exhibit a sense of rapid angularity or incongruity (as in the rapid shift from enticing marketing rhetoric to indecipherable legal-speak). In a manner of speaking, this constitutes kind of “volatility” in the realm of content and product experience.
In conclusion, the simplest means of conveying information are usually the best. But it’s also important to note that “simplicity” is both a variable and adaptive principle: it should match the level of complexity required to engage or explain a topic. With this in mind, it’s really important to know your audience. And if you truly intend to engage them, make a sincere effort to speak or write in a language that they understand.