The U.S. Supreme Court delivered a significant win for the investment industry and a blow to activist hedge funds this week.
The nation’s highest court ruled 6-3 that Section 47(b) of the Investment Company Act of 1940 does not create an implied private right of action allowing shareholders to sue for rescission of contracts allegedly violating the Act.
The decision in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd. reverses a Second Circuit ruling that had allowed private lawsuits against closed-end funds, especially those targeted by aggressive activist investors like Saba Capital.
Justice Amy Coney Barrett, writing for the majority joined by Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito, Neil Gorsuch, and Brett Kavanaugh, delivered a clear rebuke to judicial overreach.
“Congress, not the Judiciary, decides who may enforce the law,” Barrett wrote.
“The Investment Company Act designates the Securities and Exchange Commission as its primary enforcer and expressly permits shareholders and issuers of securities to enforce two of its provisions,” she wrote.
“We must decide whether another provision of the Act impliedly empowers private parties to sue for rescission of any contract that allegedly violates the Act. The answer is no,” Barrett added.
The case stemmed from Saba Capital’s activist campaign against several closed-end funds, including those managed by FS Credit Opportunities and affiliates of BlackRock.
Saba challenged board-adopted resolutions opting into Maryland’s Control Share Acquisition Act, which limits voting power for large shareholders to prevent hostile takeovers.
Saba claimed these provisions violated the ICA’s equal voting rights requirement under Section 18(i) and sought rescission under Section 47(b). Lower courts, relying on Second Circuit precedent, sided with Saba.
Barrett’s opinion emphasized statutory text and structure. Section 47(b) states that a court “may not deny rescission at the instance of any party” for performed contracts violating the ICA unless equity and the Act’s purposes dictate otherwise.
The majority viewed this as a directive to courts on remedies — not a grant of a new right to sue.
“Section 47(b)’s wording thus presupposes that parties are already before the court and directs the court’s use of its remedial authority. It says not a word about individual rights,” Barrett explained.
The ruling reinforces that the SEC holds primary enforcement authority, aligning with the conservative majority’s skepticism of implied private rights of action.
“Private litigants sometimes sue to enforce statutes that lack comparable language,” Barrett noted, rejecting the activist-era approach of implying causes of action to advance policy goals.
This decision carries profound implications for the $2 trillion closed-end fund industry, mutual funds, business development companies, and asset managers.
By closing the door on private rescission suits under Section 47(b), the Court prevents activist investors from weaponizing federal courts to force fund conversions, board overhauls, or liquidations — tactics often criticized as short-term profit grabs at the expense of long-term retail investors.
Industry groups hailed the outcome. The Investment Company Institute welcomed the ruling for preserving the ICA’s “comprehensive, carefully calibrated framework” and avoiding an “open season” of backdoor private litigation.
Skadden Arps, representing the funds, called it a “major win for the registered fund industry” that neutralizes a key activist tool.
Supporters argue the decision protects fund governance, reduces frivolous lawsuits, and lets the SEC — with its expertise and resources — handle enforcement.
It resolves a circuit split, aligning the Second Circuit with the Third and Ninth, which had rejected such implied rights.
For Main Street investors in retirement accounts, it means greater stability in funds designed for income and diversification rather than activist disruption.
Legal analysts describe the ruling as consistent with the Roberts Court’s textualist approach, limiting judicial invention of lawsuits and deferring to Congress and agencies.
It fits a pattern of curbing expansive private enforcement in securities and regulatory law, favoring predictability for businesses over plaintiff-friendly litigation.