A WORD ON DISCLOSURE DOCUMENTS: SIMPLIFY!

Byline: Peder J. Zane The New York Times

Arthur Levitt Jr. received a mind-numbing introduction to the frustrations of average investors when he was appointed chairman of the Securities and Exchange Commission in 1993. It happened when he sold most of his stocks, putting the proceeds into mutual funds to prevent possible conflicts of interest.

``I'd never owned a mutual fund before, and as I looked at prospectuses I found I didn't understand some of them,'' said Levitt, who had been chairman of the American Stock Exchange. ``I realized the SEC did a good job requiring disclosure, but not enough to make sure it was in a form most investors could understand.''

Indeed, most investors confronted with a prospectus are like foreign tourists plopped down in the middle of Times Square with only an English-language guidebook.

A few will stare intently at the financial documents, hoping to comprehend through sheer will. Many simply roll them into fly swatters or throw them away, turning to brokers, lawyers, friends and relatives for direction. Unfortunately, many of these ``experts'' are often just as befuddled.

``I'm a Harvard lawyer who's been writing these forms for years,'' said Kathleen M. Gibson, securities counsel for Bell Atlantic, and still, when she has to read them, ``sometimes I have a hard time deciphering the meaning.''

``A few sentences in,'' she added, ``and my eyes start to glaze over.''

Since he joined the SEC, Levitt has worked to create a user-friendly financial community. The agency has developed brochures that explain the basics of investing, set up a toll-free line that answers commonly asked questions - [phone] - held ``town meetings'' with investors, set up Internet access to the commission's vast corporate databases and developed a shortened ``profile prospectus'' to help investors compare mutual funds' performance.

Now the SEC is set to put into place what may be its most sweeping change: regulations aimed at reinventing the way companies communicate with their investors.

``We want to replace those impenetrable masses of linguistic underbrush with simple, concise, plain English,'' Levitt said.

Later this year, the commission plans to adopt the new clear-language rules for all disclosure filings. While that aim may seem nebulous, the SEC expects no problems with interpretation or enforcement.

``Plain English is like pornography,'' said Nancy M. Smith, director of the commission's Office of Investor Education and Assistance. ``It's hard to define, but you know it when you see it. If companies do not submit documents that comply, we will send them back and tell them to try again.''

The SEC is not simply legislating clarity. It is also going to show companies how to achieve it. Earlier this year, it organized a small group of academics and graphic designers and gave them a daunting task: translate the writing of numbers-crunching accountants and lawyers with a penchant for ``stipulating'' and ``providing however'' into pristine prose that laypeople can understand in a single reading.

Meeting in Washington and New York and with businesspeople around the country, the group is developing a guide, ``The S.E.C. Plain English Handbook,'' to aid businesses in drafting merger agreements, initial public offerings, mutual fund prospectuses and any other disclosure documents.

Using dozens of before-and-after examples from actual filings, the handbook will show companies how to turn gobbledygook into clear and concise writing. Step by step, it will suggest how to write cover pages and summaries of the information deeper within to give readers an easy but thorough synopsis.

The commission will distribute copies of the handbook when it becomes available in the fall - it can be ordered now by calling [phone] - and is planning workshops around the country to walk companies through the clear-writing process.

The problem today, said Smith, one of the SEC group's leaders, is that companies tailor their documents to a single audience: the SEC. ``Their concern has been to get the commission's approval for their filing rather than also informing their investors,'' she said. ``We want them to expand their audience so they meet all our disclosure requirements while producing documents useful to investors.''

This change can be put into place in two to three years, Smith said, because most disclosure documents are alike. Rather than try to reinvent the wheel each time, companies generally lift language that has been previously approved by the SEC and deposit it into their own filings.

Smith has no interest in eradicating this institutional plagiarism. ``We want to replace the language that is in thousands of word processors in law firms and brokerage houses today with clear language that they can cut and paste,'' she said.

William Lutz, a professor of English at Rutgers University and author of ``The New Doublespeak'' (HarperCollins, $23) is the group's language maven. Lutz, who has spent his career tracking tortuous terminology, says he almost met his match with disclosure documents.

``How dense is it?'' he asked. ``Have you ever gone through the muck on the swamp? It's the level of muck below the muck, the underlying muck that's holding up the muck you're walking through. You can spot muck because your foot gets caught in it; with this, your brain gets stuck.''

Though at times overwhelmed - especially when he encountered a single sentence that ran 470 words - Lutz said he was mostly fascinated and amazed. ``It's the same kind of experience as driving down the highway and seeing a fatal accident,'' he said, describing a kind of morbid curiosity. ``I marveled at this writing. It was dazzling and puzzling that anyone could write like this.''

He approached the task like a World War II code breaker. He broke down each impenetrable paragraph of a prospectus or other document into smaller pieces, identifying the few sentences, clauses or words he understood. He imagined every conceivable meaning for the toughest passages until he found a fit.

When he was stumped, Lutz talked to the companies that had produced the tortured phrases. ``I would read the paragraph and ask, `What does this mean?' Usually, there would be this embarrassed silence and then they would ask, `Can we get back to you?' With another company, we took 28 paragraphs from one of its filings and reduced it to three and we all agreed that we actually had better disclosure.''

Not only was the language opaque, its presentation was confusing. ``These documents achieved a perverse perfection in the way they broke almost every rule of design for clear communication,'' said Kenneth M. Morris, president of Siegel & Gale, the New York firm that designed the 1040EZ income-tax form and a simplified brokerage statement for Smith Barney. ``They were written as if paper were the most precious commodity in the world, endless lines of text without margins in the smallest possible point size.''

In designing prototypes of document cover pages and summaries for the handbook, Morris said he worked to ``air out'' the documents by increasing the margins, the type size and the space between the letters, words and paragraphs.

Through a precise use of bold and italic type as well as headlines, he reorganized the documents, highlighting key points and providing visual cues to tell investors how the material relates to what they have already read.

Of course, the group's success will depend on how easily companies can use the suggestions. In test runs, the feedback has been positive. The first guinea pig was Bell Atlantic, which agreed to let the SEC help it draft its merger agreement with Nynex.

``They told us they would expedite our review process if we let them get involved,'' Gibson of Bell Atlantic said.

Initially, Gibson said her company had the same concerns raised by others in the financial industry: whether plain English would simplify the documents so much that disclosure would be compromised, increasing the company's liability. Happily, she said, that was not the case.

``In many ways, we reduced our liability because we have created a document that is much clearer and less ambiguous,'' she said. ``In the end, these plain-English regulations should be better for business because it is targeted at the people we are trying to serve: our shareholders.''

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Photo: (Color) William Lutz, left, Nancy M. Smith, KennethM. Morris and Carolyn Miller want to put financial documents in plain English.

The New York Times