Supreme Court Rejects Implied Private Right of Action Under Section 47(b) of the Investment Company Act of 1940

On June 11, the Supreme Court, in a 6-3 decision authored by Justice Amy Coney Barrett, joined by Justices John G. Roberts, Clarence Thomas, Samual A. Alito, Neil M. Gorsuch, and Brett M. Kavanaugh, issued a pivotal and much-anticipated ruling in FS Credit Opportunities Corp. v. Saba Cap. Master Fund, Ltd., holding that Section 47(b) of the Investment Company Act of 1940 (ICA) does not provide private parties a right to sue to rescind contracts that allegedly violate the ICA. The decision resolves a circuit split, forecloses activist investors from bringing federal claims under Section 47(b), and provides much-needed clarity and regulatory certainty for closed-end funds, fund managers and directors facing activist threats.

Activist Investors’ Use of Section 47(b)

In recent years, activist investors have purchased large stakes in closed-end funds trading at a discount to net asset value (NAV) to alter fund investment strategies or force “liquidity events.” Such liquidity events, including tender offers, mergers with open-end funds, or fund liquidations, are designed to allow activist investors to capture the difference between the NAV discount at purchase and the price realized in the liquidity event as arbitrage profit, frequently at the expense of long-term investors. In response, closed-end funds have implemented protective measures, such as by-law modifications designed to limit activist voting power, to thwart activist tactics.

In turn, activist investors have sought to combat these protective measures by invoking Section 47(b) of the ICA, which states that any contract that violates the ICA, or any rule or regulation thereunder, “is unenforceable” “unless a court finds that under the circumstances enforcement would produce a more equitable result” and “would not be inconsistent with the purposes of this subchapter.” 

Background and Procedural History

In this case, Saba Capital Master Fund, Ltd., and Saba Capital Management, L.P. (collectively, Saba) held positions in one-quarter of all closed-end funds in the market, including 16 registered closed-end funds organized under Maryland law. These funds had opted into Maryland’s Control Share Acquisition Act (MCSAA), which, once adopted, restricts an investor who holds more than 10 percent of a fund’s shares from voting shares above that threshold unless approved by a two-thirds vote of other shareholders. Saba argued that the voting restriction violated Section 18(i) of the ICA, which states that “[e]xcept … as otherwise required by law, every share of stock … shall be a voting stock and have equal voting rights with every other outstanding voting stock.”[1] Saba also argued that Section 47(b)’s statement that “a court may not deny rescission at the instance of any party” gave it a private right to sue for rescission of the bylaws. 

The district court agreed with Saba, and the Second Circuit summarily affirmed, reasoning that Section 47(b) presupposes a private right of action for rescission of contracts that violate the ICA. Because the Third and Ninth Circuits had reached the opposite conclusion, the Supreme Court granted certiorari on the sole question of whether Section 47(b) of the ICA provides for a private right of action.

The Supreme Court’s Decision

The Supreme Court held that Section 47(b) did not create a private right of action. The Court noted that because Section 47(b) is silent about individual rights, private litigants must plead and prove an independent cause of action. The Court reasoned that Congress’s decision to designate the Securities and Exchange Commission (SEC) as the ICA’s primary enforcer and to create a “comprehensive agency enforcement scheme” reinforced its conclusion that “private parties generally cannot enforce the ICA.” The majority noted that other portions of the ICA, including Section 36(b), expressly provide for private rights of action, indicating that Congress “knew how” to create a private right of action to enforce the ICA and chose not to do so in Section 47(b). 

Having found that the text and structure of Section 47(b) did not provide a private right of action, the Court addressed Saba’s reliance on the Supreme Court’s 1979 decision in Transamerica Mortgage Advisors, Inc. v. Lewis, (TAMA). TAMA held that Section 215 of the Investment Advisers Act of 1940 (IAA), then identical to Section 47(b) of the ICA, created an implied private right of action for rescission of a contract. The majority disagreed with Saba’s analogy, noting that Congress’s 1980 amendments to the ICA “entirely reworked” Section 47(b), including the language on which TAMA’s reasoning turned, so TAMA did not control. 

Key Takeaways

By foreclosing a private party's ability to sue under Section 47(b), the Supreme Court eliminated a mechanism used by activist investors to challenge fund governance measures, advisory relationships, and operational contracts. The Supreme Court’s ruling has several practical implications.

• Greater Regulatory Certainty. The decision gives advisers and funds a clearer basis for relying on the body of law developed through SEC rulemaking, exemptive orders, and no-action letters, while reducing the risk of contradictory judicial interpretations in private litigation. This stability is especially important for firms that have built product innovations, such as interval funds, tender offer funds, and other structures, on the basis of SEC-granted relief.
• Reduced Litigation Exposure. The decision also reduces the threat of private litigation over a range of fund operations. Because investment companies often externalize management, key functions — including portfolio management, distribution, custody, and transfer agency — are performed by contracted service providers. The Supreme Court’s ruling reduces the risk that activist investors will use Section 47(b) to unwind such service contracts, allowing investment management companies to manage contractual relationships without the potential threat of rescission.
• Activist Investors Can Still Use State-Law Claims. The Supreme Court’s ruling does not address state-law claims that activist investors may bring against registered funds, including claims for breach of fiduciary duty, common law fraud, violations of state securities laws, or violations of state corporation or trust law.

Ultimately, registered funds, including closed-end funds and business development companies (BDCs), should bear in mind that, while there is no private right of action under Section 47(b), regulatory enforcement remains the means of policing ICA violations, making robust compliance programs critical. Accordingly, registered funds and their advisers should continue to focus on SEC examination readiness, disclosure controls, governance procedures and regulatory risk management. They should also consult experienced legal counsel before adopting or modifying any anti-takeover defenses or governance measures potentially implicated by this decision. Fund managers and directors should also continue to stay apprised of their regulatory and fiduciary obligations to ensure ongoing compliance with relevant state and federal laws.