Advisor’s Journal

 SEC’s Plain English Requirement Equals Expensive Client Disclosures (CC 10-44)

by Robert S. Bloink and William H. Byrnes

As of January 1, 2011, the Securities and Exchange Commission will require advisers to make plain-English disclosures to their clients, laying out the adviser’s business practices, conflicts of interest, and the background of the firm and its personnel. The requirement is designed to drag information out of the fine print on client disclosures and present it in easily understandable language. Although innocuous sounding on its face, the requirement will carry a significant cost in time and resources.

Compliance with the plain English requirement will be expensive, with the SEC estimating a cost of between $3,200 and $10,400 in legal fees plus an additional $3,000 to $5,000 for consulting services the first time the form is completed. And these estimates do not take into consideration the frequent amendments to the disclosures that will be necessary.

In addition to costs associated with preparation of revised disclosure forms, advisers are also required to disclose personal financial information and most every complaint lodged against the adviser. Personal bankruptcies of firm personnel and information about disciplinary events, including pending suits, must be disclosed to clients. Almost any disciplinary events occurring in the past 10 years must be disclosed, with many events older than 10 years old required to be reported. Although arbitration and arbitration settlements are not necessarily required to be disclosed, they must be disclosed if the arbitration or settlement reflects on the individual’s integrity or “implicates wrongdoing.”

SEC documentation on the requirement specifies that disclosures must be written in “short, sentences, definite, everyday words, and the active voice” without the use of confusing jargon. Walking this tightrope between adequate disclosure of complex information and plain English will require a high degree of skill. And SEC guidance on the plain English requirement is anything but plain. The SEC release implementing the plain English requirement is 174 pages in length, and the SEC Plain English Handbook supplementing the release comes in at another 83 pages. As evidenced by the extensive documentation issued by the SEC, the process of writing plain English disclosures is complex and will require the assistance of attorneys and other consultants.

Although the plain English requirement initially will affect only SEC registered investment advisers, States are likely to follow the SEC’s lead, applying the plain English requirement to other financial professionals.
For previous commentary, see AdvisorFX Journal  What You Don’t Know Yet Might Hurt You: A Broker’s Duties under the Financial Reform Act

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