When was the last time you read an investment prospectus or a company financial report that you could actually appreciate for its style? Chances are that you have never come across documents filed with the Securities and Exchange Commission that can approximate a decent level of readability. The New York Times is said to be written in a style that can be easily comprehended by readers whose education levels are at least equivalent to the 10th grade, but this cannot be said about SEC filings.
Once a business entity is required to register an SEC company listing, further compliance may involve filing of financial statements and other regulatory documents intended to be freely accessible not just to investors but to the public in general. The idea is that anyone can be a prospective investor, particularly if a company is listed on a financial platform such as the New York Stock Exchange or the NASDAQ, but when you sit down to read many of these SEC filings, you almost get the feeling that financial writers are not trying to attract investors; instead, it seems as if they intend to confuse them.
In a 2011 study published in the Accounting Review, the academic journal of the American Accounting Association, a research team from the University of Michigan reviewed thousands of earnings forecasts written by analysts between 1998 and 2010. Among the various findings of the research team, one that really stuck out was related to overall readability; the more confusing and muddled the projections were, the less certain they were overall. In other words, whenever analysts were unable to determine if future earnings were going to be positive or negative, they resorted to linguistic obfuscation instead of writing something along the lines of “we cannot come up with a projection at this time.”
We should keep in mind that outside analysts who read these reports can be influential in terms of attracting investors, but what kind of commentary can we expect them to issue if they are not able to read statements written by their colleagues? In many cases, SEC filings are given to compliance specialists and legal departments for review prior to submission, and this is when things get murkier because of the legalese that is often added to documents that were already confusing to begin with.
In 1998, the SEC issued a writing style handbook that emphasized the use of plain English in sections of certain filings and documents. This guide was originally intended for internal use because nobody could understand SEC literature; however, the agency later encouraged everyone in the financial industry to heed the instructions of the handbook for the benefit of investors. As evidenced by the aforementioned study, not many financial writers followed the advice of the SEC, but things started to change in 2010 with the implementation of the Plain Writing Act, which has been working with universities and training programs at major investment banking firm in order to ensure that investors can read SEC filings with confidence and without confusion.