Plain Language Means Better Regulation

Published in Clarity 51, May 2004

Douglas M. Hyndman
Chair, British Columbia Securities Commission
Vancouver, British Columbia

Financial regulators are not the first people that leap to mind when you think about plain language. We have a reputation, earned over many years, of using obtuse legal jargon and spewing out rules, guidelines and other documents that numb the minds of unfortunate souls forced to read them.

Here is a paragraph from a policy the Canadian securities regulators published in 1983.

Where the proceeds of the issue are being applied to the property being reported upon, the person making the report required to be filed with the administrator (Commission) must be free of any association with the issuer. Therefore, except where specifically provided for in the Regulations, the report shall not be written by a director, officer or employee of the issuer or of an affiliate of the issuer or who is a partner, employer or employee of such director, officer or employee or who is an associate of any director or officer of the issuer or of an affiliate of the issuer. The report shall not be submitted if the person making it or any partner or employer of or associate to him beneficially owns, directly or indirectly, any securities of the issuer or of a subsidiary thereof or, if the issuer is a subsidiary, any securities of the parent issuer. This latter restriction does not apply to a person, partner, employer or associate, as the case may be, if the person, partner, employer, or associate is not empowered to decide whether securities of the issuer or the parent issuer, as the case may be, are to be beneficially owned, directly or indirectly, by him, or if he is not entitled to vote in respect thereof.

Did you get that?

At the British Columbia Securities Commission, we have been changing the way we communicate with our stakeholders. We have adopted plain language as an important part of how we do our job as the regulator of British Columbia’s capital markets. Plain language is not an end in itself but a tool to make our communication clearer and our regulation more effective.

As securities regulators, we have a difficult job — overseeing a complex financial market to protect investors and support the integrity of the market. We have a set of rules that are necessarily complex and we deal with stakeholders who have widely varying interests and levels of sophistication. We have learned that we can do our job better if we communicate effectively with these people and speak to them in language that they can understand.

Communicating with industry and professionals
A scheme of regulation can work only if most of the regulated community voluntarily complies with the rules. Legal enforcement is time consuming and expensive, so we can use it only to deal with the minority who deliberately or negligently flout the appropriate standards of market conduct. We can help the honest and diligent majority, who want to do what is right, by making our rules accessible and understandable both to people in industry and to their professional advisers.

For the past few years we have been trying, with increasing success, to write our official communications — notices and policies — in plain language. It has been remarkable to see how we have been able to cut away the dense verbiage that traditionally characterized these documents and to give industry and professionals a clear and unambiguous message.

We have also been writing more explanatory material — brochures and web pages — to explain our rules and how to comply with them. The plain language approach complements our efforts to push this material out to industry and educate members of the regulated community about their obligations.

We are now developing a new Securities Act and new rules, also in plain language. A major objective is to provide a system in which business people can figure out what they have to do to comply without routinely calling in their lawyers. They will still need legal advice for difficult or complex matters, but we think compliance will be better, and regulation less burdensome, if the people in the business can read and understand the rules and directly put their minds to what they should be doing.

We still have much to do to achieve this goal. For example, we replaced the policy containing the paragraph I quoted at the beginning of this article with a new rule that is somewhat easier to read but is still pretty complex. We also produced a brochure that explains the equivalent aspect of the rule this way:

A qualified person is not independent if:

The qualified person is or expects to become a director, officer or employee of the issuer or an insider or affiliate of the issuer, or
The qualified person owns or expects to receive options or other securities of the issuer or of an affiliate of the issuer, or
The qualified person owns or expects to receive an interest in the property or in a property within two kilometres of the property, or
The qualified person has received the majority of his or her income, in each of the three years preceding the date of the technical report, from the issuer and insiders and affiliates of the issuer.

We think this at least gives the businessperson who has to comply with the rule a fighting chance of understanding what it means.

Communicating with investors
The raison d’être of securities regulators is to protect investors. We do that, in large part, by giving them information, either directly in the form of warnings and educational material or indirectly by requiring industry to provide disclosure.

Most investors rely on financial advisers to help them make decisions about buying and selling securities. We have rules governing the conduct of advisers. The rules are supposed to stop advisers from taking advantage of clients by providing advice that serves the adviser’s, not the client’s, interest. However, the rules cannot completely protect investors — they have to protect themselves too.

The investment business and securities regulation are plagued by technical jargon that most investors find hard to understand. When faced with investment choices that are described in unclear or complex language, many investors are afraid to demonstrate ignorance by asking for a clearer explanation. Instead, they just go along with the adviser’s recommendation, even if they feel uncomfortable with it. Some unscrupulous advisers exploit this psychological reaction to cheat investors. We are using plain language to fight back.

First, we have been using plain language ourselves as a core element in our investor pamphlets and web pages and in a series of “Investigate before you invest” seminars. We want to help investors understand and avoid the major pitfalls of the securities markets. Plain language strips away the camouflage of confusion and deceit and empowers the investor with a better understanding of risk and choice.

Second, we are trying to move public companies and investment firms toward the use of plain language in disclosure to investors. Our securities law has required for decades that prospectuses for new share offerings contain “full, true and plain disclosure.” Unfortunately, plain has been the poor cousin of full and true, and very few prospectuses could be said to meet that standard. We have not done much over the years to enforce the plain requirement. Companies and their directors have been disciplined for prospectuses that fell short of being full or true, but no one has ever faced an enforcement action for a prospectus that was not plain.

No doubt it is harder to prove that a document is not plain than that a fact is missing or a statement is false. However, now that we have begun using plain language in our own communications, we intend to push industry to do so too. We propose to include in our new legislation a requirement that all documents industry has to file with us or give to investors be written in plain language. We will then use our existing regulatory review processes to identify and seek correction of documents that fail to meet that standard.

We recognize that change will not happen overnight, but we think that we can make a difference, and help give investors documents they will find useful, by getting started and keeping the pressure on.

As the readers of Clarity know, a plain language culture, like Rome, cannot be built in a day. In any organization, some people jump on the bandwagon quickly and become the leaders of the plain language transformation. Others accept the concept but find that writing in plain language is more easily said than done. Some traditionalists do not like the concept at all, either because they confuse plain language writing with “dumbing down” or because they fear losing the liturgical power of technical jargon.

For a successful transformation, the leaders of an organization have to adopt plain language personally and keep pushing it as a basic value. This works best if it is as part of a broader cultural transformation that places value on communication and transparency, both within the organization and with the outside world.

We are making that change at the British Columbia Securities Commission because it will help us do a better job of protecting investors and making our securities markets fair and efficient.