Litigation funding is gaining traction globally. Each year the number of lawsuit funding companies is growing astronomically, and the sector has grown to a multi-billion dollar market. According to law firm Brown Rudnick, the litigation financing market had 39 billion dollars in global assets as of 2019, and the market share is growing with time. This exponential growth of the sector has attracted the attention of the Securities and Exchange Commission of the USA. The SEC’s lawyers and examiners are gathering data on investments by the hedge funds in the lawsuit funding arrangements.
SEC has proposed a regulation that will bind the private funds to report the details of their spending on litigation financing. SEC Chair Gary Gensler is pushing this potential reporting to ensure transparency in the hedge fund industry. He argues that the potential reporting will result in greater transparency and it will play an instrumental role in protecting investors and monitoring systemic risk to the US economy. If the regulations are given legal sanction, the agency will be empowered by law to initiate an investigation or launch legal action against hedge funds for their involvement in false or misleading disclosures.
Scott Mascianica, a Holland & Knight partner and former SEC lawyer shared his opinion about the prospective litigation financing disclosure requirement and said, “They will use it as a tool in their toolbox to aid their enforcement and their exam program.”
The share of hedge funds in the legal funding industry is not known. Some of the prominent names in the industry include D.E. Shaw & Co., Elliott Management Corp, and some other firms. Under the potential regulations, hedge funds will have to disclose the percentage of their money invested in pre-litigation finance. Maya Steinitz, professor of law at the University of Iowa, has called the regulation light touch. In her words, “It’s a very light-touch regulation as far as regulation goes” because the sector will have to disclose percentage only, and the details submitted to the commission will not be published and they will remain confidential. The small funds are absolved from the potential disclosure requirement at the initial stage, and only the large funds will have to provide information. With time, the former may also be bound by the disclosure requirement.
However, the hedge fund sector is still suspicious about the regulations. Managed Funds Association CEO Bryan Corbet criticized the regulations and claimed that they would have “dubious utility.” Hedge funds do not want to disclose information just like other litigation funders, who have been successful in fighting against national disclosure rules.
Only the court of New Jersey has imposed a duty on the litigants to disclose information about funding, but there are no similar disclosure requirements in other states. They claim that the disclosure of the information is unnecessary and it can create an issue for the growing market.