Acid Test Looms for the Best (and Worst) in Offer Disclosure Documents

In November nominations will open for the 2020 Plain English Awards, which are organised by the WriteMark Plain English Awards Trust.  This is a golden opportunity for offerors of securities to expose themselves to the discerning scrutiny, impartial appraisal, and, if need be, jocular censure of the judges in order to see who can win one of the coveted accolades. 

For those willing to put their money where their mouths are and stump up the modest entry fee, potential competition categories for regulated offer disclosure documents include Plain English Champion, Plain English Document, Plain English Legal Document, and Plain English Turnaround. 

There are also the democratic People’s Choice awards, whereby friends or enemies alike can, at no charge, respectively put up or dob in an offer disclosure document for the judges’ special attentions.   There are two awards in this outstanding category: the eagerly sought Best Plain English Communication and the frantically avoided Worst Brainstrain Communication, whereby plaudits or brickbats may be heaped respectively upon the heads of worthy recipients according to their desserts. 

If your offer disclosure documents are subject to the likes of:

• Financial Markets Conduct Act 2013 (FMCA) and FMCA Regulations
• Retirement Villages Act 2003 (RVA) - then this is the competition for you!

If you think your offer disclosure documents presently represent the pinnacle of plain English expression, then entering the 2020 Plain English Awards competition affords the gratifying prospect of being proven right in an acid test.  On the other hand, for offerors who are currently revising their disclosure documents, the Plain English Turnaround Award provides stimulus for enhancement.

Trustees Executors hereby throws down the gauntlet to its esteemed clients who are required by law to produce offer disclosure documents to step up bravely to the plain English challenge and be judged!  Let not false modesty bar your way to the moment of triumph!

For those for whom competitions are not their cup of tea, we pose a thought experiment: Close your eyes and simply imagine that your regulated offer disclosure documents have already been submitted to the Plain English Awards competition and that you one of the panel sitting in judgement upon them.  What kind of grade do you believe this panel could in all honesty give these documents – a win, a pass, or a fail? 

Plain English is a Compulsory Subject

It is not simply a literary exercise to tone up the prose of one’s offer disclosure documents.  Laws and regulations specify that the text must be written to certain minimum standards.  The RVA, for example, requires in section 27 that occupational right agreements must be offered in “a clear and unambiguous form”.  In the FMCA, section 61(1) states that, “An issuer that prepares, or is required to prepare, a PDS [ie., product disclosure document] must ensure that the information in the PDS is worded and presented in a clear, concise, and effective manner.” 

The other principle constraint on PDS content is covered under Section 2 of the FMCA (Fair Dealing, prohibiting false, misleading or deceptive conduct).

For the benefit of issuers under the FMCA, the Financial Markets Authority (FMA) has helpfully published some style guides as to what is expected.  These include*:

• Statements of Investment Policy and Objectives under the FMC Act (Guidance note November 2014)
• Effective Disclosure** (Guidance note December 2014)
• Content and form of Disclose register information (Guidance note February 2015)
• Product disclosure statements: understanding investor’s information needs (April 2018)
• Offers under the FMC Act (25 September 2019)
• FAQs (25 September 2019)

* Note: The FMA has been having issues with its website at the time of our publication, and so some of the links listed above may not function as previously.

**Note: On its website the FMA states that this paper “is now no longer relevant”, but this statement relates to the transitional legislative regime it was written for.  In actual fact, the paper’s Section B: Clear, concise and effective (pp. 15-9) is a superb analysis from the FMA itself of what the statutory requirement in the FMCA’s section 61(1) is intended to mean.  More generally, the guidance note is an excellent style guide for those writing regulated offer disclosure documents for retail investors.  

Making an Example: Managed Investment Schemes (MIS)

The typical regulated offer disclosure documents required for an MIS include the product disclosure statement (PDS), the statement of investment policy and objectives (SIPO), and other material information (OMI).

The rules for writing the PDS are highly prescriptive as to form and content, right down to limitations on word count.  The core best practice advice from the FMA on PDS writing is to omit needless words and aim to write even less than the maximum prescribed word counts.

Figure 1: Permitted word counts for various PDS types

Source: FMA website

The PDS is well-embedded in best practice rules and typically well-written these days, although there is always room for improvement.  Where, as a Supervisor, Trustees Executors can see the need for greater effort is in the SIPO and OMI that are published as companion documents.

SIPO writing is prescribed in style and content to a significant degree, but is not subject to rigid PDS rules such as maximum word counts and mandatory provision of a key information summary (KIS).  Because a SIPO can be a complex and lengthy document, and marketing considerations may have significant influence on how it is phrased, steely editorial discipline is necessary to ensure that it sticks to the point throughout and does not deviate one iota from the legislated linguistic standards of clearness, concision, and effectiveness.

The OMI is where information is deposited that cannot otherwise fit into the PDS.  As the name suggests, the information to be included should be material to a regulated offer of securities. 

Section 57(1)(b)(ii) of the FMCA and Regulation 42 of the FMCA Regulations capture in broad outlines what should appear in OMI.  However, materiality by itself should not be sufficient regarding inclusion of information in the OMI: ideally the same stylistic disciplines should apply as are imposed on the PDS and SIPO, namely plain English writing that is clear, concise, and effective. 

The Supervisor has a required role to play as active co-editor working with equal interest and responsibility alongside the offeror in all these legislatively controlled and specified documents. 

As with the PDS, so too with the SIPO and OMI, should be the golden rule for writing style applying across all three.

Armed with this rule, we wish our clients well who choose to enter the 2020 Plain English Awards!