Ex-SEC Chief Arthur Levitt Renews Call for Plain-English Disclosures

‘Tell it to Aunt Edna’ is still good advice

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Financial disclosures that are written so that it is impossible for the average citizen to understand it has been, and remains, a bad idea, according to former SEC Chairman Arthur Levitt.

In The Wall Street Journal on Saturday, Levitt called for language in financial documents that was clearer and easier to understand. In other words, don’t use big words and industry terms that ordinary people have never seen. Jargon and legalese, he said, while they protect the discloser of a product’s risks, often do nothing for the potential investor, who remains as ignorant of the risks as if the documents were written in a foreign language—which, in a sense, they are.

Citing the attitudes of Mark Twain and Will Rogers toward big words and obfuscatory (that’s “designed to make things unclear”) explanations, as well as the time-honored instruction by editors to reporters to “tell it to Aunt Edna,” Levitt once again entreated the financial community to clarify disclosure so that ordinary people without legal educations or financial expertise can understand the risks of the products they’re buying.

However, he pointed out, often that’s exactly what issuers are afraid of: “[M]ost issuers of equities, debt and other investment instruments are deeply afraid that if they wrote plainly, someone might actually understand what was at stake,” he said. “Imagine what would happen if a stock prospectus said: ‘You could lose your shirt if you buy this.’ "

Yet that’s just what’s needed, he said, to avoid such fiscal catastrophes as that caused by the sale of “[i]nvestments [that] were packaged and sold without the kind of forthright disclosure that would have made plain their riskiness." In fact, he pointed out, “the more documentation necessary to explain an investment, the more likely it was to fail."

The natural instinct of a person to soften the blow of risk when explaining investments, he added, has to be countered to avoid future financial disasters. In other words, investors need to be told, in words of one syllable: Buy this. Take risks.

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