SEC Requires Financial Advisers to Use Plain English, but Will Clients Get the Message?

You can dumb it down to plain English. You can shorten it to four pages. You can tell people it’s important. But one thing you can’t do is get people to read the disclosure information before they invest in a fund.

Fund groups can avoid financial jargon and legalese if ordered to do so, but they have little motivation actually to encourage prospective customers to understand the impact of fees and conflicts of interest. The new four-page disclosure form mandated by the Securities and Exchange Commission for financial advisers requires them to tell retail investors the factsOpens a new window , but not to explain why they’re important.

A Rand Corporation study for the SEC as it developed Form CRS found that the average person spends only 46 seconds reading about fees in the new disclosure format and 22 seconds about conflicts of interest. They don’t seem to realize that these are the two factors that could be the biggest drag on returns from their investment.

Usability testing

One lawmaker, Democratic congressman Sean Casten of Illinois, was so skeptical of the new form’s effectiveness that he proposed a bill requiring the SEC to conduct usability tests to make sure the form is achieving its goals. The bill passed the House in OctoberOpens a new window , but it is not likely to get very far in the Republican-controlled Senate.

Critics point to other problems with the new format. Steve Galetto, a partner at law firm Stark & StarkOpens a new window , notes that the length and disclosure of the document will depend on whether it is filed by a registered investment adviser or by a broker-dealer. Timing will vary because it’s required for new clients but only presented to existing clients if they open a new account or take up a new service.

Plain English has been something of a holy grailOpens a new window for regulators for years. In 1998, the SEC published A Plain English Handbook: How to Create Clear SEC Disclosure Documents, and more than a decade later Congress passed the Plain Writing Act of 2010.

Dirty Harry

Former congressman Christopher Cox helped reinvigorate the plain English movementOpens a new window when he took the helm of the SEC in 2005. In a 2007 speech, Cox mocked traditional disclosure documents by rendering Clint Eastwood’s very plain challenge to a wounded criminal in Dirty Harry in the convoluted legalese of most disclosures.

Dirty Harry’s warning that a shot from his 44 Magnum “would blow your head clear off” was rendered as “you should be advised that were the projectile from this instrument to strike you in the region between the apex of the cranium and the base of the lower mandible, it would completely sever this entire portion of your anatomy, and in addition transport it a considerable distance from its original location.”

But Dirty Harry’s question was still hanging in the air: Do you feel lucky? That’s the question no prospectus or form can answer, whether it’s in plain English or legal jargon.

Chasing a chimera

The idea that plain speaking is the key to effective communication may be a chimera. Federal Reserve chairman Jerome Powell has repeatedly declared he wants to be a champion of plain English in discussing monetary policy and do away with the opaque circumlocutions of previous Fed chairmen.

But it hasn’t worked out too well in practice. On numerous occasions, Powell has sent markets on a roller coaster ride with plain comments that seemed contradictory. Former vice-chairman Donald Kohn has chided Powell for making plain EnglishOpens a new window the enemy of “necessary nuance.”

Ultimately it comes down to what you say, not how you say it.