Plain English Is a Legal Requirement in American Finance

What the rule binds, and what it leaves alone

The scope is narrow and worth stating precisely, because the rule is often described as though it governed the whole document. It applies to the cover page, the summary, and the risk factors section of a prospectus.¹ The body of the prospectus is governed by the general standard in the same regulation, which asks for information presented in clear, concise sections, paragraphs, and sentences, with descriptive headings and subheadings.²

Six requirements apply to the three covered sections. They are short sentences, definite and concrete everyday words, the active voice, tabular presentation or bullet lists for complex material wherever possible, no legal jargon or highly technical business terms, and no multiple negatives.²¹

The regulation also names four things a filer must avoid. They are legalistic or overly complex presentations that obscure meaning, vague boilerplate that lacks precision, complex information copied from legal documents without explanation, and repetitive disclosure that lengthens a document without improving it.²

The list is checkable, which is why it travels

Six requirements sound like a matter of taste until they are read as instructions to a reader with a pencil. Sentence length is a number. The proportion of sentences in the passive voice is a number. Whether a sentence carries two negatives is a matter of fact. Whether a defined term is used before it is explained can be found with a search.

That is why the same list is useful far outside securities filings. It converts a complaint that a document is heavy into a set of findings, each of which can be shown to the person who wrote it. A drafter told that a risk factor is unclear has been given nothing to act on. Now suppose that drafter is shown three findings. The section's mean sentence runs past forty words, six of its sentences carry more than one negative, and a term defined on page 30 is used on page 12. That is a morning's work with a visible end.

The cost the Commission expected, and the one filers actually meet

The Commission estimated first-year costs at roughly $7,200 per filing, and expected savings over time through shorter documents and fewer questions from investors.¹ The estimate assumed that the work is a rewriting job done once.

In practice the recurring cost sits elsewhere. A prospectus is assembled from sources drafted by different people at different times, and the three covered sections summarize material that lives in full further down. Every time the underlying language changes, the plain English summary of it can stop matching. Checking that a summary still says what the section it summarizes now says is not a writing task at all. It is a consistency check, and it is the kind of work Editors Canada places within copy editing, which it defines to include checking for and correcting errors and inconsistencies and checking mechanical consistency.³

Where an editor's authority ends on a document like this

An editor working on a filing can report sentence length, voice, negatives, undefined terms used early, boilerplate that repeats, and a summary that no longer matches its source. Those are findings about the words, and each can be demonstrated on the page.

Whether a particular risk must be disclosed, whether a description is accurate, and whether the document as a whole satisfies the Commission are questions for the filer and their securities counsel. An editor who answered them would be giving legal advice. Everything a client sends is treated in confidence, including draft filings, financial statements, and correspondence with advisors.

The wider point outlives the rule that produced it. The federal government has twice written down what clear writing means: once for prospectuses in 1998, and again in the Plain Writing Act of 2010. That act defines plain writing as writing that is clear, concise, well-organized, and follows other best practices appropriate to the subject and intended audience.⁴ Two definitions, written twenty-two years apart for different purposes, and neither of them mentions elegance.