At the 2012 Face of Finance Conference, at Bentley University, in Waltham, MA, Deborah Bosley (UNC Charlotte/The Plan Language Group) presented "Regulatory Requirements for Plain Language: Making Financial Information Transparent".
public is angry lowest level of trust in 30 years intense federal scrutiny consumer skepticism people pretend to understand
TRUST OF ALL INSTITUTIONS AT ALL TIME LOW
If creditor makes change in credit card account terms, the Change in Terms notice must providesummary of the changes made on the required tablestatements that changes are being made to account consumer has right to opt out of changes and how date changes become effective when new rates override penalty rates balances to which the current rate apply no more than four principal reasons for the rate increase
Research on Privacy Notices60 financial privacy notices of major financial institution American Express Very difficult 27th gradeBank of America Difficult 15th grade
Research on Privacy Notices – Kleimann Communication Group 60 financial privacy notices of major financial institution American Express Very difficult 27th gradeBank of America Difficult 15th grade
CAARD placement of disclosure in an advertisement and its proximity to the claim it is qualifying, prominence of the disclosure, whether items in other parts of the advertisement distract attention from the disclosure, whether the advertisement is so lengthy that the disclosure needs to be repeated, whether disclosures in audio messages are presented in an adequate volume and cadence and visual disclosures appear for a sufficient duration, and whether the language of the disclosure is understandable to the intended audience.
Expert testimony in AT&T and B of A (Fleet Boston)First Circuit opinion Morales-Alejandro v. Medical Card SystemERISA imposes important requirement on plan administrators & insurers to communicate accurately with plan participants and beneficiaries. See Bard, 471 F.3d at 244-45. Part of the communication requirement is the SPD provides information "written in a manner calculated to be understood by the average plan participant, and shall be sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan." 29 U.S.C. § 1022(a). Section 1022(b) specifies the information to be included in the summary. When the terms, language, or provisions of the SPD conflict with the plan, the language that claimant reasonably relied on in making and proving his claim will govern the claim process. Bard, 471 F.3d at 245.
The purpose of the Compensation Discussion and Analysis section is to explain the process that the Compensation Committee (“the Committee”) uses to determine total compensation for each of our named executive officers. The section describes all of the components included in total compensation:1) annual (base salary and cash incentives)2) long-term (restricted stock and stock options)3) benefits (retirement, perquisites).Bristol-Myers Prudential Coca-Cola General Electric Schering-Plough Pfizer …294 more
Enhance Disclosure Requirements: Currently fund distribution costs are not well understood by investors, in part because these costs are often referred to obscurely as “12b-1 fees.” In addition, fund transaction confirmation statements delivered to investors typically do not include sales charges.The proposal would require the fund to identify and more clearly disclose distribution fees. In particular, the fund would have to disclose any “ongoing sales charges” and any “marketing and service fees” in the fund’s prospectus, shareholder reports and investor transaction confirmations. Transaction confirmations also would have to describe the total sales charge rate that an investor will have to pay.
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requires agencies to write “clear communication that the public can understand and use emphasizes the importance of establishing “a system of transparency, public participation, and collaboration.”
Regulatory Requirements for Plain Language: Making Financial Information Transparent
Regulatory Requirements for Plain Language: Making Financial Information Transparent presented by Dr. Deborah S. Bosley Associate Professor of English at UNC Charlotte and Principal, The Plain Language Group firstname.lastname@example.org presented to THE FACE OF FINANCE October 24, 2012 All material in this slide presentation is copyrighted. No material may be used in any other context without permission from Dr. Deborah S. Bosley.
How plain is this?"I know what youre thinking. Didhe fire six shots or only five?Well, to tell you the truth, in allthis excitement, Ive kind of losttrack myself. But being as this is a44 Magnum, the most powerfulhandgun in the world, and wouldblow your head clear off, youvegot to ask yourself one question: Do I feel lucky?”
How SEC regulators might write it?"I imagine that you are harboring significant uncertaintyconcerning the precise number of times that thehammer of this particular multi-shot firearm wascocked, its cylinder was advanced, the hammer wasthen released at the rear of its travel, the round in thechamber was fired, and the cylinder was then advancedonce again — and specifically whether the exact figureis six, or possibly only five…I myself am experiencingdifficulty in quantifying the discharges with exactitude.… a result, it is appropriate that you pursue a specificand directed line of inquiry and self-examination…inview of all the facts and circumstances, and giving dueweight to the relevant risk factors, is it your consideredjudgment that you are more likely than not to berelatively fortunate?” Former SEC Chairman Christopher Cox at theCenter for Plain Language Symposium, 2009
Here’s the agenda1. What are the problems?2. What is plain language?3. How do we know it works?4. What laws | regulations require plain language?
1. What are the problem?• cell phone agreements• insurance policies• mortgage contracts• credit card statements• internet | software agreements• proxy statements (CD&A)• investment | shareholder information• code of ethics• liability• the language of regulations
1. What are the problems?• disclosure ≠ communication• accuracy ≠ understanding• information ≠ answers• what readers need to know ≠ what you want to tell them• compliance requires understanding• legalese not always required• intense federal scrutiny• corporate trust at all time low
Lack of trust and understandingInvestors • 63% intentional • 84% distrust companies1Corporations • decreases accurate earnings forecasts2Lenders • 90% up-front fees, 80% APR, 65% penalty31 Siegel& Gale: A Clarion Call for Transparency, January 2009.2 Reuven Lehavy, Feng Li, and Kenneth Merkley (2011) The Effect of Annual Report Readability on Analyst Following and the Properties of Their Earnings Forecasts. The Accounting Review: May 2011, Vol. 86, No. 3, pp. 1087-1115.3 2006 study by the Federal Trade Commission: 819 prime and sub prime mortgage customers
Why plain language is important Too much complexity• 71 Stanford students evaluated writing samples: "moderately complex" to "highly complex”• As complexity increased, judges’ estimation of authors intelligence declined11 DanielM. Oppenheimer. “Consequences of Erudite Vernacular Utilized Irrespective of Necessity: Problems with Using Long Words Needlessly.” Applied Cognitive Psychology, October 2005.
The language of regulationsBEFORE: If there is an increase in an anAPR, annual fee or minimum interest charge dueto a 60 day past due payment, the notice muststate that the increase will cease to apply totransactions that occurred prior to or within 14days of provision of the notice, if the creditorreceives six consecutive required minimumperiodic payments on or before the paymentdue date, beginning with the first payment duefollowing the effective date of the increase.79 words; 33rd grade
BEFORE: If you turn age 701/2 this year, federalminimum distribution rules generally require that youreceive some income from your retirement planaccumulations by April 1 following the year you turn701/2 — April 1, 2007 — or the April 1 after the year youretire,* whichever comes later. Although April 2007 isthe deadline, you can receive your minimum distributionin 2006. If you wait until 2007 to receive your minimumdistribution for 2006, you will receive two payments in2007. One payment will satisfy the minimum distributionrequirement for 2006 and another payment will satisfythe 2007 requirement. You must also begin receivingincome by April 1, 2007, regardless of your employmentstatus, from any accumulations in TIAA-CREF’sTraditional IRAs or other companies’ traditional IRAs, orfrom qualified plans (including Keogh plans) if you are a5% owner of the plan. If you turned age 70 1/2 before2006, you must receive enough income by December…
AFTER: We are writing to you becauseyou are subject to the minimum distributionrequirements of the Internal Revenue Code.Since you are or will be 701/2 or older this year,you need to receive at least a minimum amount ofincome. The following shows when you need toreceive this income based on your age: If you turn 70 1/2 If you turn 70 1/2 in 2007 in 2006 or earlier Must begin by Must begin by April 1, 2008 December 31, 2007
2. What is plain language?Plain language is the use of provenwriting and designing strategiesthat make it easy for the intendedaudience to understand, find, anduse the information.Clear | Credible | Honest
Myths about plain language• means dumbing down• oversimplifies or changes the meaning• subverts terms of art• means just changing words• does not work as well as traditional legal language
Plain language strategies• write for intended audience | purpose• focus on structure• use active voice• use pronouns• use positive language• be succinct• use legal terms of art only if “irreducible”• use common words when possible• write short sentences | paragraphs• use headings• include visuals (tables, figures, etc.)• test document for usability
“There is no right way to do a wrong thing.” Whirlpool’s Code of EthicsBefore: “Management is responsible for making surethat proper attention is given to, and that controlsare in place for, promoting compliance with our codeof conduct and the specific Company policiesaddressing each area. Employees who fail to abide by these Companypolicies will face corrective action, up to and including termination ofemployment. As to executive officers, senior financial officers, anddirectors, the requirement that you adhere to these policies mayonly be amended or waived by the board of directors ofWhirlpool, or a committee thereof, and we will disclose to ourshareholders within four business days any amendment orwaiver of these policies made by the board of directors on behalf of anyexecutive officer, senior financial officer, or director.” 69 wordsaverage 41; 25th grade
“There is no right way to do a wrong thing.” Whirlpool’s Code of EthicsAfter: Management is responsible for• requiring compliance with our code of conduct and policies; and• making sure compliance controls are in place.Employees who do not live up to these policies will suffer penaltiesincluding the possible end of their employment.Executive officers, senior financial officers, and directors arerequired to adhere to these policies unless the board of directorsor a committee waives this requirement. In that case, we must notifyshareholders within four business days of such waivers.16 average words; 14th grade
3. How do we know it works? Study of legal documents and the use of plain language Improved understanding -- 31% from 50.5% to 66% • more likely to be read | understood • easier to comply • strongly preferred • less likely to cause mistakes • fewer questions | fewer complaints • decreased some likelihood of litigation • saved time and money1Michael E.J. Masson & Mary Anne Waldron, Comprehension of Legal Contracts by Non-Experts: Effectiveness of Plain Language Redrafting, 8 Applied Cognitive Psychology . 67, 75, 77 (1994).
Investments and reputationIf clear: • increases investment dollars1 • provides higher corporate reputation21 Loughran, T. and McDonald, Bill (2009) Measuring Readability in Financial Texts. Unpublished paper.2 Gebbart, J. and Lawrence, J. Predicting Firm Reputation Through Content Analysis of Shareholders’ Letters.Corporate Reputation Review. Vol. 11, No. 4, 284-30
4. What are existing laws | regulations that require plain language? • PRIVACY • HIPPA • GLB • ERISA • CAARD Act • Dodd-Frank • Consumer Financial • Protection Bureau • TILA | RESPA • SEC: Form ADV, Part II • DOL 401(k) Fee Disclosure • Plain Writing Act of 2010
Health Insurance Portability and Accountability Act (HIPAA)“A covered entity can satisfy theplain language requirement if itmakes a reasonable effort toorganize materials for needs ofreaders; write short sentences inactive voice, use “you” and otherpronouns; use common words;divide materials into shortsections.”
Gramm-Leach-Bliley (GLB)“Notices must be ‘clear andconspicuous’… a notice must bereasonably understandable anddesigned to call attention to thenature and significance of theinformation in the notice.”
Example of opt-out notice“If you prefer that we not disclosenonpublic personal informationabout you to nonaffiliated thirdparties, you may opt out of thosedisclosures, that is, you may direct usnot to make those disclosures (otherthan disclosures permitted by law.)”
Credit Card Accountability Responsibility & Disclosure Act of 2009 (CAARD) -- “clear and conspicuous” • disclose terms in language consumers can see | understand • give clear account terms before | after opening accounts • show consequences of decisions • display payment amount total interest cost for 36 month payoff
Employee Retirement Income Security Act (ERISA)• Summary Plan Description shall be "writtenin a manner calculated to be understood bythe average plan participant, and shall besufficiently accurate and comprehensive toreasonably apprise such participants andbeneficiaries of their rights and obligationsunder the plan.”• Inaccurate, incomprehensible or misleadingexplanatory material will fail to meet therequirements of this section.See Bard, 471 F.3d at 244-45.
ERISA lawsuits“Many plans are operating undercarelessly worded SPDs that leavetheir sponsors open to liability.”Mark Stember, benefits attorney, Washington, D.C. office of Kilpatrick Stockton LLP“If you are sued [under ERISA], thefirst thing an attorney will do is seeif your SPD follows ERISA guidelines.”Jonathan Edelheit, VP of United Group Programs, third-party administrator (TPA) Boca Raton, Fla
Dodd-FrankMortgage disclosures• Simpler than old forms• Highlight information consumers need• Easier to look out for risks• More time to consider choices
TILA | RESPA• uses plain language comprehensible to consumers• succinctly explain information that must be communicated to consumers• contains a clear format | design
President Barack Obama holds up a proposed mortgage application form as he speaks at the James Lee Community Center in Falls Church, Va., Wednesday, Feb. 1, 2012. (Credit: AP Photo/Cliff Owen)http://www.consumerfinance.gov/knowbeforeyouowe/
SEC: Form ADV, Part II “In its current form … the formatfrequently does not correspond well toan adviser’s business…the requireddisclosure may not describe theadviser’s business or conflicts in away that is truly accessible to theinvestor.”New requirementsUse narratives | Improve formatExpand content | Ensure easy accessUse plain English
SEC new CD&A disclosures rules for 2010• increase transparency of company compensation | governance• disclose compensation and governance that contribute to risk• include comp information for employees if risks effect company• disclose information to evaluate potential for conflict of interest for compensation consultants
SEC fact sheet on DOL fee disclosureThe proposal would require the fund to• identify | more clearly disclose distribution fees• disclose “ongoing sales charges” | “marketing and service fees”• describe total sales charge rate an investor has to pay
Plain Writing Act of 2010Any document necessary to getfederal benefits or services orfiling taxes• explains how to comply• letters | publications | forms | notices| instructions• does not include regulations