Client Alert
On June 11, 2026, the United States Supreme Court issued its decision in FS Credit Opportunities Corp., et al. v. Saba Capital Master Fund, Ltd., et al., holding that Section 47(b) of the Investment Company Act of 1940 (the “1940 Act”) does not create an implied private right of action. The decision is significant for investment companies registered under the 1940 Act because it clarifies that Section 47(b) empowers courts to rescind a contract but does not create a separate private right of action to seek such remedy, while leaving intact the SEC’s enforcement authority under the 1940 Act. As described further below, the decision is a major victory for registered investment companies and their boards and advisers.
Case and Procedural History
The petitioners are registered closed-end management investment companies incorporated in Maryland (the “Funds”). The Funds each separately opted into the Maryland Control Share Acquisition Act (“MCSAA”), which limits voting rights for shareholders holding specified threshold amounts of shares (unless other shareholders reinstate such voting rights), in an attempt to avoid activist investor takeovers. The respondents, Saba Capital Master Fund, Ltd. and Saba Capital Management, L.P. (collectively, “Saba”), pursue activist investment strategies involving closed-end funds, including acquiring positions large enough to influence fund strategy or structure.
Saba sued the Funds in June 2023, alleging that, by opting into the MCSAA, the Funds violated Section 18(i) of the 1940 Act, which requires every share of stock issued by a registered management company to be voting stock with equal voting rights. In bringing suit, Saba argued that Section 47(b) of the 1940 Act provided it with a private right of action to seek rescission.
The district court, following existing Second Circuit precedent in Oxford University Bank v. Lansuppe Feeder, LLC (2019), agreed with Saba and granted summary judgment in Saba’s favor. The Second Circuit summarily affirmed. That decision conflicted with prior rulings by the Third Circuit in Santomenno ex rel. John Hancock Trust v. John Hancock Life Insurance Co. (2012) and the Ninth Circuit in UFCW Local 1500 Pension Fund v. Mayer (2018), both of which found no such implied private right of action. The industry closely followed the case, with multiple industry groups submitting amicus briefs. Notably, the Supreme Court requested the views of the US Solicitor General’s Office, underscoring the significance of the issue.
The Supreme Court’s Holding
In a 6–3 decision authored by Justice Barrett, the Court reversed the Second Circuit’s decision and held that Section 47(b) does not create an implied private right of action under the 1940 Act. In reaching this holding, the Court reasoned:
- The text of Section 47(b) does not have the requisite rights-creating. The Court emphasized that Congress, not the judiciary, decides who may enforce federal law. The Court highlighted the importance of the amendments to Section 47(b) that Congress enacted in 1980, which, in the view of the Court, entirely reworked the structure of Section 47(b) and made the courts a key actor. The revised text of Section 47(b) directs the courts to take certain remedial actions in the eyes of the Court, rather than grant individuals rights or a cause of action;
- Rescission is a remedy, not a cause of action. The Court explained that Section 47(b) presupposes that parties are already before a court and directs how the court should evaluate rescission; it does not itself create a right of action; and
- The 1940 Act’s enforcement structure does not support finding an implied private right of action. The Court noted that the structure of the 1940 Act empowers the SEC as the primary enforcement agent of the 1940 Act, and that Congress included only two exceptions to this general framework.1 It further reasoned that, consistent with its prior precedent, where Congress explicitly created a private remedy in one provision, the Court historically has not concluded it implicitly created a private remedy in Accordingly, since Congress explicitly created private rights of action elsewhere in the 1940 Act, the Court reasoned it did not mean to do so implicitly in Section 47(b).
Notably, in deciding whether Section 47(b) creates a private right of action, the Court did not decide whether the Funds violated Section 18(i) of the 1940 Act by opting into the MCSAA. Justice Kagan dissented separately, and Justice Jackson filed a dissent joined by Justice Sotomayor and, in part, by Justice Kagan. The dissents would have recognized a private right of action based on Section 47(b)’s text, statutory history, and legislative history.
Practical Implications
The decision in FS Credit Opportunities resolves litigation uncertainty around whether Section 47(b) creates a private right of action. As a result of the Court’s decision, private plaintiffs will need an independent cause of action outside of Section 47(b) to sustain a suit against a registered investment company, potentially making it more difficult for activist investors to challenge governance decisions made by a registered investment company or its board. Accordingly, this ruling is crucial for registered investment companies and their boards (particularly, closed-end funds) that have faced the threat of litigation in trying to act in the long-term interests of shareholders to protect against activist threats. The Investment Company Institute (ICI) and the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA AMG), which filed an amicus brief in support of the Funds, have expressed support for the decision. In their brief, ICI and SIFMA AMG argued that recognizing a private right of action under Section 47(b) risked “upending the long-established regulatory structure governing the registered fund industry” and would cause “significant regulatory uncertainty and wasteful litigation.” The Court’s decision notwithstanding, activist investors such as Saba have already indicated they will still consider future litigation using alternative avenues. Additionally, while the Court resolved the private right of action question, it did not address the underlying merits of whether control share provisions violate Section 18(i). Because the SEC withdrew its prior guidance on this issue in 2020, questions remain about how funds should evaluate state control share statutes, and funds and their boards should continue to monitor SEC guidance and enforcement activity in this area.
- Such exceptions are provided for: (i) in Section 36(b) of the 1940 Act, which allows security holders to sue investment advis ers for breaches of fiduciary duty; and (ii) through incorporation of an express right of action from the Securities Exchange Act of 1934, allowing recovery of certain short-term profits realized by certain insiders.
