Supreme Court Rejects Implied Private Right of Action Under ICA Section 47(b)

The US Supreme Court’s landmark decision in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., which resolves a split among several federal circuit courts, reduces litigation risk for investment companies under the Investment Company Act of 1940 (ICA) and deals a blow to activist investors.

The Court’s decision held that Section 47(b) of the ICA does not create an implied private right of action permitting private parties to seek rescission of contracts that allegedly violate the Act.

Reversing the Second Circuit, the Court concluded that Section 47(b) is remedial, providing for rescission in actions otherwise properly before a court, rather than a congressional grant of authority to private litigants to bring standalone rescission claims. The decision upends Second Circuit law, aligns with that of federal appellate courts previously rejecting implied private rights of action under Section 47(b), and substantially weakens a tactic that activist investors had used in litigation against investment companies.

The ruling also reinforces the Supreme Court’s reluctance to recognize implied private rights of action absent clear congressional authorization and confirms the Securities and Exchange Commission’s (SEC’s) role as the principal enforcer of the ICA.

THE DISPUTE AND LOWER COURT PROCEEDINGS

The dispute arose from challenges brought by activist investor Saba Capital Master Fund, Ltd. and related entities against several closed-end funds organized under Maryland law.

The funds had adopted resolutions opting into provisions of the Maryland Control Share Acquisition Act (MCSAA), a Maryland corporate law statute that applies to corporations organized under Maryland law, including investment companies. The MCSAA limits the voting rights of shareholders who acquire significant ownership positions unless those rights are approved by other shareholders.[1] The limits counteract a strategy often used by activist investors to acquire substantial stakes in closed-end funds to influence or alter their investment strategies.

Saba alleged that the resolutions violated Section 18(i) of the ICA, which provides that every share of stock issued by a registered investment company must be voting stock with equal voting rights.[2] Saba sought rescission under another provision of the ICA—Section 47(b)—which expressly addresses contracts made or performed in violation of the Act.

At the trial level, the US District Court for the Southern District of New York (Rakoff, J.), following Second Circuit precedent, held that Section 47(b) impliedly authorizes private parties to sue for rescission and granted summary judgment in Saba’s favor. The Second Circuit summarily affirmed, reinforcing a preexisting conflict with decisions from other federal courts of appeals.

THE COURT’S DECISION

In a 6-3 opinion authored by Justice Amy Coney Barrett, the Supreme Court reversed and held that Section 47(b) does not impliedly authorize private parties to bring rescission claims under the ICA.

The Court emphasized that the US Congress, not the judiciary, determines who may enforce federal statutes and that implied private rights of action are strongly disfavored absent clear evidence of congressional intent.

Focusing on the text of Section 47(b), the Court concluded that the provision is directed to courts rather than private litigants. Section 47(b) provides that a court may not deny rescission of a contract that violates the ICA “at the instance of any party” unless equitable considerations warrant a different result. As the Court held, this language presupposes that the parties are already properly before the court and merely instructs courts regarding the availability of rescission as a remedy—it does not create an independent cause of action.

The Court also relied on the broader structure of the ICA. It noted that Congress designated the SEC as the primary enforcer of the statute and expressly created only limited private rights of action elsewhere in the Act. The Court reasoned that Congress’s decision to establish specific enforcement mechanisms in certain provisions while remaining silent in Section 47(b) strongly suggests that no additional private cause of action should be implied.

The dissenting justices argued that Congress amended Section 47(b) in 1980 with the expectation that courts would continue to recognize private rescission actions and relied heavily on legislative history supporting that interpretation. The majority rejected that approach in favor of reliance upon the statutory text and structure.

IMPLICATIONS AND RECOMMENDATIONS

The Court’s decision has important implications for registered funds, investment advisers, boards of directors, and market participants operating under the ICA.

Significant Reduction in Shareholder Litigation Exposure

Funds and their advisers face substantially reduced exposure to rescission-based litigation brought by shareholders or activist investors under Section 47(b). As a result, litigation risk is likely to shift back toward more traditional claims, including those alleging breach of fiduciary duty, as well as proxy, disclosure, and governance-related challenges.

Consolidation of Enforcement Authority in the SEC

The decision confirms that primary enforcement responsibility for alleged ICA violations rests with the SEC. Investment companies should expect Section 47(b)-related issues to be addressed principally through SEC examinations, investigations, and enforcement actions rather than through private rescission lawsuits.

Reinforcement of the Court’s Clear-Statement Approach

The decision continues the Court’s broader trend of requiring clear congressional authorization before recognizing private rights of action. Parties seeking to assert rights under the ICA—and potentially other federal statutes—will likely face increased scrutiny where the statute does not expressly authorize private enforcement.

Channeling of Disputes into Regulatory and Defensive Contexts

Although the Court foreclosed standalone rescission claims under Section 47(b), the provision remains relevant. Parties may continue to invoke Section 47(b) in existing litigation, including as a defense to contractual enforcement efforts, in SEC enforcement proceedings, or in certain state-law disputes where rescission is otherwise available.

Enhanced Contractual Stability and Predictability

By limiting private rescission claims, the decision provides greater certainty regarding contractual arrangements involving investment companies, including governance provisions, financing arrangements, service agreements, and other long-term contractual relationships. Market participants may view the decision as reducing the risk that contracts will be unwound through private federal litigation.

Continued Importance of Compliance Programs

Because regulatory enforcement remains the principal mechanism for policing ICA violations, robust compliance programs remain critical. Investment companies and advisers should continue to focus on SEC examination readiness, disclosure controls, governance procedures, and regulatory risk management.

Alignment with the Majority of Federal Circuits

The Court’s ruling resolves a longstanding circuit split, rejecting the view of the Second Circuit in favor of federal appellate courts that previously declined to recognize an implied private right of action under Section 47(b). As a result, the availability of rescission claims under the ICA should now be applied more uniformly across jurisdictions.

Benefits for Closed-End Funds

The decision may also provide closed-end fund boards with greater flexibility in evaluating control share provisions and other governance measures designed to address activist campaigns, while remaining subject to applicable fiduciary duties and federal securities law requirements. This development is particularly noteworthy given the continuing uncertainty surrounding the application of Section 18(i) of the ICA to state-law control share statutes.

Although the Division of Investment Management staff stated in the 2010 Boulder Total Return Fund no-action letter that MCSAA control share provisions were inconsistent with Section 18(i)’s equal-voting-rights requirement, the staff withdrew that letter in 2020. The SEC Commission has not formally taken a position on whether the use of state-law control share statutes by closed-end funds complies with Section 18(i).

CONCLUSION

The Supreme Court’s decision in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd. represents a significant development in federal securities litigation and investment company regulation. By holding that Section 47(b) of the ICA does not create an implied private right of action for rescission, the Court substantially narrows the ability of private litigants to challenge alleged ICA violations through federal litigation and reinforces the SEC’s central role in enforcing the Act.

Investment companies, advisers, fund boards, and other market participants should review the decision carefully and consider its implications for litigation strategy, contractual arrangements, compliance programs, and regulatory risk management going forward.