Staff Legal Bulletin No. 7 (CF)

“Plain English Disclosure”

Action: Publication of the Division of Corporation Finance

Date: September 4, 1998

Summary: This staff legal bulletin provides helpful information on the plain English rule and amendments that apply to public companies filing with the Division of Corporation Finance. This rule and the amendments were adopted by the Commission on January 22, 1998, and take effect on October 1, 1998.

Supplementary Information: The statements in this legal bulletin represent the views of the staff of the Division of Corporation Finance. This bulletin is not a rule, regulation, or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content.

Contact Person: For further information please contact Carolyn A. Miller, Attorney-Adviser, at (202) 942-2890.

Brief Description of the New Plain English Rule and Amendments

• to write the forepart of these registration statements in plain English;

• to write the remaining portions of these registration statements in a clear, understandable manner;
  and

• to design these registration statements to be visually inviting and easy to read.

In addition to amending a number of disclosure and form requirements, the Commission adopted new Rule 421(d) and amended Rule 421(b).

Rule 421(d) – The New Plain English Rule

• short sentences;

• definite, concrete everyday language;

• active voice;

• tabular presentation of complex information;

• no legal jargon; and

• no multiple negatives.

Amended Rule 421(b)

• clear, concise sections, paragraphs, and sentences &150; using, whenever possible, short explanatory sentences and bullet lists; and

• descriptive headings and subheadings.

• legal and highly technical business terminology; and

• frequent reliance on glossaries or defined terms as the primary means of explaining information. Define terms in a glossary or other section of the document only if the meaning is unclear from the context. Use a glossary only if it facilitates understanding of the disclosure.

Last, registrants should avoid:

• legalistic or overly complex presentations that make the substance of the disclosure difficult to understand;

• vague "boilerplate" explanations that are imprecise and readily subject to different interpretations;

• complex information copied directly from legal documents without any clear and concise explanation of the provision(s); and

• repetitive disclosure that does not enhance the quality of the information.

The new rule and amendments take effect October 1, 1998. Since their adoption in January, we have been asked several substantive and procedural questions about them. This staff legal bulletin answers the most commonly asked questions.

Questions and Answers

Question 1

A: They apply only to prospectuses filed under the Securities Act of 1933.

Question 2

A: For the past several months, we have been training the staff on how to apply the plain English rules consistently to registration statements. We expect to continue these training sessions at least through the end of this year. In addition, we have made plain English training a core part of the Division's training program for new attorneys and accountants.

Question 3

A: A registrant with a highly technical business should provide a brief, general description of its business with, if necessary, concrete examples to illustrate the description. For example, compare the following two descriptions of Computational Systems, Inc. The first is from the company's 1996 10-K, which is not subject to the plain English rules. The other is from the summary section of a merger proxy that the company and Emerson Electric Company filed as part of the Division's plain English pilot program:

Computational Systems, Inc. 10-K1

Computational Systems, Inc./Emerson Electric Company's merger proxy2

The Company primarily designs, produces and markets an integrated family of advanced predictive maintenance products and services for use in large scale, continuous run manufacturing facilities. The Company's Reliability-Based Maintenance products and services help customers detect potentially disruptive conditions in the operation of their machinery before damage or complete mechanical failure occurs, thereby allowing maintenance to be scheduled at the most appropriate time.

CSI's primary business is the design, manufacture, and sale of a family of high-tech instruments that help companies determine when their industrial machines are in need of repair or adjustment. CSI also offers services to help its customers better manage the maintenance of their equipment. CSI's products and services help its customers keep their production lines running and maintain the quality of their products which may be adversely affected by an improperly functioning production line machine. CSI's customers are primarily large manufacturing, processing or power generating companies.

Question 4

A: You should use a glossary only if:

• you must include terms in your prospectus that are understood only by industry experts; and

• you cannot make the meanings of these terms clear from the context or explain them concisely where you first use them.

You should not use a glossary to define commonly understood abbreviations, like SEC, or acronyms, like NASDAQ. Further, you should not use a glossary to define terms that you have created solely for the purpose of your registration statement. We urge you not to create a vocabulary that is unique to your offering, with the exception of brand or trade names you use to identify the type of security you are offering.

Question 5

A: No. The plain English rule and amendments do not apply to pre-effective amendments for registration statements filed before October 1. The plain English rule and amendments apply to:

• registration statements that are first filed on or after October 1;

• post-effective amendments filed on or after October 1 to include the registrant's latest audited financial statements in the registration statement or to update the prospectus under Section 10(a)(3)³; and

• prospectus supplements first filed on or after October 1.

Question 6

A: No. You do not have to amend the base prospectus to comply. However, as we noted in our answer to question 5, any prospectus supplements you file on or after October 1 must comply.

Question 7

A: Yes. We believe this is consistent with our requirement that prospectus supplements filed on or after October 1 comply with the new plain English rule and amendments.

Question 8

A: Registration statements and post-effective amendments filed under Rules 462(b) or (c) must comply only if their underlying registration statement was first filed on or after October 1.

Question 9

A: No. The information you incorporate by reference in response to a general requirement need not comply. For example, Item 12 on Form S-3 requires you to incorporate by reference your recent Exchange Act reports in their entirety.

However, any information you incorporate by reference to satisfy a specific disclosure requirement must comply with the applicable plain English rule and amendments. For example, on Form S-3, if you incorporate by reference risk factors from a Form 10-K to satisfy Item 3, the risk factors must comply with Rule 421(d).

Question 10

A: As we noted in our answer to question 9, the risk factors you incorporate by reference must comply with Rule 421(d). In this instance, you can:

• amend your 1934 Act filing to include risk factors that comply with 421(d);

• file and incorporate by reference an 8-K that includes risk factors that comply with 421(d); or

• include risk factors that comply with 421(d) in your 1933 Act registration statement rather than incorporate them by reference.

Question 11

A: Yes. Any information that you physically include in a prospectus must comply.

Question 12

A: Yes.

Question 13

A: No. We will consider the date you first submit your registration statement for staff review as your initial file date for this purpose.

Question 14

A: No. For those proxy materials that qualify for confidential treatment under Rule 14a-6, we will consider the date you filed them confidentially as proxy materials as your initial file date for this purpose.

Question 15

A: We believe the unique nature of these offerings and the risks they present to investors warrant requiring the issuer to highlight these risks on the cover page. Of course, the cover page, summary, and risk factors section must otherwise comply with the plain English rule and amendments.

Question 16

A: Possibly. We may choose to review a filing solely for compliance with the new rule and amendments. We call this type of spot check a "monitor." The number of monitors we conduct depends on many factors, such as work load.

Question 17

A: The same staff member who is assigned to review your registration statement will also conduct the plain English review. Plain English comments you receive, if any, will appear in your regular comment letter.

Question 18

A: The staff will read the registration statements for clarity. The standards in Rule 421(d) and the guidance in the amendments to Rule 421(b) give registrants the tools they need to write clear disclosure documents. While the staff generally will not issue grammar comments, it may cite these rules in comments that are issued to help clarify registrants' disclosure.

Question 19

A: No &150; not at the expense of completeness or accuracy. The goal of plain English is clarity, not brevity. Writing disclosure in plain English can sometimes increase the length of particular sections of you document. You will likely reduce the length of your plain English document by writing concisely and eliminating redundancies &150; not by eliminating substance.

Question 20

A: As many people know, when registrants file their registration statements electronically on our EDGAR system, the document's layout is lost. Because the new plain English rule is intended to enhance the readability of the prospectus through language and design, we need to see the layout of the plain English sections as you are delivering them to investors.

The staff member assigned to your filing will call to request paper copies of the prospectus. We are working to upgrade our EDGAR system to permit the filing of an exact duplicate of the paper copy sent to investors but this may not occur for some time.

Question 21

A: Yes. Under Rule 461(b)(1), the staff may ask the Commission to deny acceleration of a registration statement's effective date "[w]here there has not been a bona fide effort to make the prospectus reasonably concise, readable, and in compliance with the plain English requirements of Rule 421(d)."

Question 22

A: Yes. Since April, 1996, the Division of Corporation Finance has been running a plain English pilot program in which public companies voluntarily write their disclosure documents in plain English. Pilot participants receive detailed feedback from the staff on their plain English efforts and revise their disclosure accordingly.

To date, the companies that participated in the pilot have produced well over 100 examples of plain English disclosure documents, ranging from annual meeting proxy statements and merger proxies to initial public offering prospectuses and offerings of structured securities. We compiled a 756 page book that contains many examples of these plain English filings. You can get a photocopy of this book, "Plain English Pilot Program: Selected Plain English Samples," from the SEC's Public Reference Room or a printed copy from Bowne Publishing in New York City.⁴

We also prepared a booklet entitled "Before & After Plain English Examples and Sample Analyses." This booklet contains actual before and after examples of pages from pilot participants' filings with a sample plain English analyses. You can get a photocopy of this booklet from the SEC's public reference Room or a printed copy from RR Donnelley Financial, financial printers, in New York City.⁵

And, "A Plain English Handbook: How to Create Clear SEC Disclosure Documents," issued by the Office of Investor Education and Assistance, is now available in final form. You can download a copy from our website at www.sec.gov or request a paper copy by calling 1-800-SEC-0330.

Last, the adopting release for the final plain English rule and amendments is available on our website.

http://www.sec.gov/interps/legal/slbcf7.htm