December 15, 2014

SEC Filings: How “Readable” Are They?

As noted in this blog, the WSJ ran this follow-up article a few months ago to a previous piece about Corp Fin’s comment letters. The latest article focuses on the “readability” of SEC filings (what is also known as “usability”). Here’s what it says:

Examiners at the Securities and Exchange Commission, as we explained this weekend, spend some of their time catching typos, demanding better punctuation and asking companies to rephrase impenetrable parts of official filings. So is it working? Not really. SEC filings remain pretty impenetrable. We sent lengthy excerpts from a half-dozen documents filed by six big companies — Apple AAPL -1.21%, General Electric GE +1.26%, General Motors GM +0.70%, JPMorgan Chase JPM +0.34%, UnitedHealth Group UNH +1.42% and Wal-Mart Stores WMT +0.94% — to Educational Testing Service, the outfit that runs the SAT and other school-entrance exams.

All the excerpts came from the companies’ most recent annual reports, and we picked parts of the more accessible sections: descriptions of the companies’ businesses, the principle risks they face and discussions of their recent results. The verdict, according to ETS: The words used in the filings tended to be abstract, academic and generally difficult. Sentence structures were moderately difficult. Some of the excerpts were relatively disjointed, and none could be considered conversational. Using ETS’s yardstick, the language typically qualifies as grade 13 to 14 — a grade-level or two above what is considered “college and career ready,” with grade 12 “encompassing the complexity levels likely to be found in college textbooks.” (It’s also worth noting that ETS recently altered its grade-level standards, so today’s grade 12 is closer to grade 14 under older measures.)

The companies varied in their comprehensibility. General Motors fared best, at a grade level of 12.5, helped by language that was more concrete and built out of less-complex sentences. JPMorgan Chase fared worst, at a 13.7 overall grade level, hurt by syntactically complex sentences, less-familiar vocabulary and a fair amount of abstraction.

None of the English in the excerpts was particularly plain. All scored poorly when measures on how conversational the style was, with Apple, General Electric and General Motors all faring particularly poorly. (Wal-Mart and United Healthcare fared best by that measure.) JPMorgan spokesman Joe Evangelisti said the company has to balance clarity and thoroughness in a complex industry. “We’re trying to simplify, we’re trying to reduce redundancy,” he said. “The fact is, we have to be complete too.” GE said it has taken steps to make its filings more readable, in part by adding a summary to its discussion of quarterly results. GM declined to comment. It’s also worth noting that, with some noticeable exceptions, big companies tend to put more effort into making their filings readable. That suggests that the rest of the filings out there could well be worse.

It isn’t as if the SEC is having no effect. In Saturday’s piece, we looked at changes requested by the SEC to filings by Technology Applications International NUUU -0.68%, a small company that, among other things, uses NASA-patented technology to make cosmetics. An SEC attorney originally questioned the company’s reference to a device called a “rotatable perfused time varying electromagnetic force bioreactor.” Successive rounds of feedback from the SEC led the company first to rephrase and then to expand and simplify its original explanation of the device (and add a picture). The changes lowered the grade-level rating for the excerpt from 14.1 — among the highest of any of the samples we sent ETS — to about 12.9, closer to the relatively readable General Motors filings. The biggest improvements came with somewhat simpler vocabulary, more concrete language and a slight improvement in sentence complexity.

Still, by ETS’s reckoning, anyone who would struggle over a college textbook could expect to have trouble making sense of the filing — or any of the filings we sent them.

NYSE Proposes to Delist Companies for Late 10-Qs

Here’s an excerpt from this blog by Ethan Mark:

The NYSE proposes to amend its continued listing requirements in relation to the late filing of a company’s annual report with the SEC as set forth in Section 802.01E, or the Late Filer Rule, of the Listed Company Manual. As amended, the Late Filer Rule will:

– expand the rule to impose a maximum period within which a company must file a late quarterly report on Form 10-Q in order to maintain its listing; and

– clarify the NYSE’s treatment of companies whose annual or quarterly reports are defective at the time of filing or become defective at some subsequent date.

Crowdfunding: A Cool Infographic

In this blog, Anthony Zeoli bemoans the belated nature of final crowdfunding rules from the SEC. Meanwhile, I’m adding to my recent blog about states who have already opened its doors to crowdfunding by telling you about this nifty infographic from Orchard Platform…

– Broc Romanek