The majority ruled that Section 47(b) does not empower private parties to sue for rescission of any contract that violates the ICA, reversing the Second Circuit’s judgment and remanding for further proceedings.
The U.S. Supreme Court’s 6-3 decision authored by Justice Amy Coney Barrett in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., 608 U.S. __ (2026) held that Section 47(b) of the Investment Company Act (ICA) does not impliedly empower private parties to sue for rescission of contracts that allegedly violate the ICA. The decision resolves a circuit split, reverses the U.S. Court of Appeals for the Second Circuit and significantly curtails the ability of activist investors to challenge closed-end fund governance structures through private action.
Parties and Background
FS Credit Opportunities Corp. and the other petitioners (together, Funds) are investment companies that manage closed-end mutual funds, a favored investment vehicle for long-term investors. Closed-end funds contain a fixed number of shares issued at one time. After the shares are issued, capital does not regularly flow into the funds as investors buy and sell shares. Rather, the shares are traded on the open market, which determines their price.
The respondents, Saba Capital Master Fund Ltd. and Saba Capital Management L.P. (together, Saba), manage open-end mutual funds. Unlike their closed-end counterparts, open-end funds continually issue new shares to investors and do not trade on the market. Open-end funds are highly liquid because capital continually flows in and out as trading occurs. Saba are so-called activist investors—they identify low-performing closed-end funds in which to purchase large stakes to alter the closed-end fund’s investment strategies or convert them to open-end funds.
To protect against activist-investor takeover and prevent rapid shifts in fund control, the Funds incorporated under the Maryland Control Share Acquisition Act (MCSAA), which limits voting rights for shareholders holding disproportionate shares (like activist investors) unless other shareholders approve. The Funds adopted resolutions opting into the MCSAA’s limitation of voting rights for shareholders holding disproportionate shares.
In June 2023, Saba sued the Funds, alleging their resolutions violated the ICA’s requirement that “every share of stock … shall be a voting stock and have equal voting rights with every other outstanding stock.” 15 U.S.C. § 80a-18(i). Saba sought rescission of the resolutions under Section 47(b) of the ICA, which provides that “a court may not deny recission [of contracts that violate the ICA] at the instance of any party unless such court finds that under the circumstances the denial of rescission would produce a more equitable result than its grant and would not be inconsistent with the purposes of” the ICA. Id. at 80a-46(b)(2).
The Lower Courts’ Decisions
The U.S. District Court for the Southern District of New York, following the Second Circuit’s decision in Oxford University Bank v. Lansuppe Feeder, LLC, 933 F.3d 99 (2d Cir. 2019), held that Section 47(b) of the ICA creates an implied private right of action to sue for contract rescission and granted Saba summary judgment. The Second Circuit summarily affirmed, after which the Supreme Court granted certiorari to resolve a circuit split on whether Section 47(b) contains an implied private right of action.
The Supreme Court’s Opinion
The majority ruled that Section 47(b) does not empower private parties to sue for rescission of any contract that violates the ICA, reversing the Second Circuit’s judgment and remanding for further proceedings.
The Court’s Reasoning
In its opinion, the majority began by reaffirming that Congress, not courts, determines who may sue to enforce federal law. The Court noted that, under the governing framework from Alexander v. Sandoval, 532 U.S. 275 (2001), a statute must use “rights-creating language aimed at protecting a particular class of persons” and that language focusing on “the person regulated rather than the individuals protected” is insufficient. The Court also explained that a statute’s express comprehensive agency enforcement scheme—in this case, the assigning of enforcement responsibility to the U.S. Securities and Exchange Commission (SEC)—may support foreclosing an implied private right of action.
The Court then analyzed the key language at issue in Section 47(b) of the ICA, concluding that the language “a court may not deny rescission at the instance of any party” is a “mandate directed to … courts” and not a provision conferring rights on or protecting a class of persons. According to the Court, the key actor under Section 47(b) is a court, not an individual. Therefore, the provision instructs a court on its remedial authority when parties are already before it; the provision does not speak to the rights of the parties to appear before the court in the first place.
The Court also emphasized that rescission is a remedy, not a cause of action under contract law. Per the Court, Section 47(b) is aimed at making recission easier to achieve by overriding the onerous common-law default rule barring recission of a contract that has already been performed fully. In other words, Section 47(b) “unlocks remedies that would otherwise be unavailable,” but “[i]t does not create a cause of action.”
Furthermore, the Court pointed to certain markers in the ICA’s statutory history supporting its conclusion. First, the Court noted that the SEC (not private citizens) bears primary responsibility for ICA enforcement, and the SEC may investigate and bring enforcement actions for injunctive relief or civil penalties. Per the Court, a comprehensive agency enforcement scheme supports its conclusion that private parties generally cannot enforce the ICA. Second, the Court reasoned that when Congress wishes to provide a private remedy to enforce the ICA, it does so expressly, as evidenced by the ICA (i) permitting security holders to sue advisers for breach of fiduciary duty and (ii) incorporating an express right of action from the Securities Exchange Act of 1934 for recovery of short-term profits realized by a regulated individual. The Court explained that it is “reluctant to conclude that Congress implicitly created a private remedy in one provision when it explicitly did so in another.”
Rejection of Saba’s Counterarguments
The Court also specifically rejected Saba’s counterarguments, which primarily relied upon Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11 (1979) (TAMA), a Supreme Court decision finding an implied private right of action under Section 215 of the Investment Advisers Act (IAA). Section 215 of the IAA provides that contracts whose formation or performance violates the IAA “shall be void,” 15 U.S.C. § 80b-15(b), which, according to TAMA, implied a private right of action to “void [an] investment advisers contract.” Based on TAMA’s reasoning, Saba argued that Section 47(b)’s “at the instance of any party” language likewise indicated Congress’ intent to create a private right of action. But the Court disagreed, stating that TAMA was not relevant to the instant issue because Congress had revised the ICA in 1980 to remove, among other things, the ICA’s analogous phrase “shall be void.” The Court also limited TAMA’s relevance because it blessed only a “limited private remedy … to void an investment advisers contract,” not to void any type of contract that allegedly violates the ICA.
Finally, the majority addressed and dismissed the dissent’s reliance on legislative history—specifically, House and Senate committee reports—expressing Congress’ “wish” that courts liberally imply private rights of action. The majority criticized this use of legislative history as attempting to discern subjective congressional intent (i.e., reading Congress’ minds) rather than interpreting enacted text. The majority noted that the committee reports specifically referenced Section 47(b) as providing a “remedy” (not a cause of action) and provided “statutory guidance in interpreting that equitable rescission remedy”—language that, according to the majority, offered further support for the position that rescission is a remedy, not a right of action.
Takeaways
There are several key takeaways from the Court’s decision:
Impact on Activist Investors
The decision significantly limits the ability of activist investors—like Saba—to challenge closed-end fund governance structures through private litigation under the ICA. Investors (including, now, those in the Second Circuit) can no longer invoke Section 47(b) as an independent cause of action to rescind fund resolutions or contracts that they deem violative of the ICA’s equal-voting-rights requirement.
Closed-End Fund Governance
The decision provides comfort for closed-end funds that have sought protection from activist-investor takeovers by incorporating in jurisdictions with favorable laws and adopting state-law control-share provisions (e.g., the MCSAA) as defensive measures against rapid shifts in fund control. These funds may proceed with greater confidence that these structures should no longer face challenges in the form of private federal rescission suits under Section 47(b).
Narrowing the Scope of Private Enforcement of the ICA
The decision further confirms that private enforcement of the ICA is confined to its two express private rights of action: (i) fiduciary duty claims under 15 U.S.C. § 80a–35(b) and (ii) short-swing profit recovery under 15 U.S.C. § 80a–29(h) (which incorporates 15 U.S.C. § 78p(b) explicitly). Private parties cannot use Section 47(b) as a general-purpose vehicle to challenge ICA violations through rescission actions.
SEC Enforcement Primacy
The decision reinforces that the SEC is the primary enforcer of ICA compliance. Going forward, parties who believe an investment company has violated the ICA will need to seek SEC enforcement action rather than bringing their own federal suits under Section 47(b). Particularly given the SEC’s finite resources, however, it is unlikely that the SEC will pursue ICA enforcement actions with the same frequency with which private litigants may have sought to enforce their own rights, were they empowered with an implied right of action. Alternatively, as the majority explains, aggrieved investors may be able to pursue actions under other provisions of the ICA or under state law.
Private Causes of Action
Finally, the decision sends a clear signal to courts, practitioners and professionals that courts will continue to be skeptical of interpreting any statute—whether securities statutes or otherwise—to create implied causes of action. As the majority made clear, if Congress wants to create a cause of action, it must do so clearly and expressly.
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