SEC Tells Private Equity Firms to Report on Litigation Finance

Big private equity firms must privately report on the bets they make in the multi-billion-dollar litigation finance market under regulations the SEC approved Wednesday.

The Securities and Exchange Commission voted 3-2, along party lines, to adopt the requirements as part of rules to better police private equity firms and hedge funds, which operate in relative darkness. The rules also oblige large hedge funds to confidentially tell the SEC about major losses within three days, among other demands.

Private equity firms, which generally focus on long-term investments, could previously sidestep specific disclosures about litigation finance under commission rules from 2011. The lawsuit funding rules will now force them to report confidentially to the agency the percentage of their capital targeted for use by law firms as part of an investment strategy.

“A lot has changed in the 12 years since we first adopted these reporting rules to the SEC,” Gary Gensler, the commission chair, told reporters after the vote. “That’s just one area that that’s occurred.”

The rules come as litigation funders put up more than $3.2 billion for new lawsuits through mid-2022, an almost 16% jump from the prior 12-month period, according to Westfleet Advisors, a litigation finance advisory firm.

The SEC is taking other action to elicit litigation finance reporting from private funds under what is known as Form PF.

The commission also is finishing up work on disclosure rules for hedge funds. Last year, it proposed requiring hedge funds to confidentially report how much litigation finance makes up the value of their assets. They would need to disclose it using a net asset value calculation, which factors out liabilities. The plan would give them the option of reporting the percentage of their capital put toward funding lawsuits.

The agency sees the proposed rules as separate from the new regulations, William Birdthistle, director of the SEC’s Division of Investment Management, said Wednesday. The SEC had suggested in its most recent regulatory agenda that it would finalize the proposed rules by last month.

“It does get quite confusing if we’re taking multiple cracks at the same form,” Commissioner Hester Peirce, one of the two Republicans members of the SEC to oppose the measure, said before the vote.