Supreme Court Holds No Implied Private Right of Action Under Section 47(b) of the Investment Company Act

Key Takeaways:

• The U.S. Supreme Court held that Section 47(b) of the Investment Company Act of 1940 (the “ICA”) does not empower private parties to sue for rescission of contracts that allegedly violate the ICA.
• This ruling eliminates a key mechanism used by activist investors in recent years to bring private enforcement actions under the ICA in response to various defense measures adopted by closed-end funds and their boards.
• The ruling has substantial implications for funds, including registered closed-end funds and business development companies, as it will strengthen anti-takeover defenses, reduce litigation exposure across operations, and provide greater regulatory certainty.

On June 11, 2026, in a 6-3 decision authored by Justice Barrett, the Supreme Court issued its much-anticipated decision in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., holding that Section 47(b) of the Investment Company Act of 1940 (the “ICA”) does not empower private parties to sue for rescission of contracts that allegedly violate the ICA. The decision reversed the Second Circuit’s holding and resolves a circuit split that had persisted since the Second Circuit’s 2019 decision in Oxford University Bank v. Lansuppe Feeder, LLC. The decision represents a significant victory for registered funds, eliminating a “back door” mechanism pursued by certain activist investors in recent years to bring private enforcement actions under the ICA in response to defense measures adopted by various closed-end funds (“CEFs”) and their boards.

The Question Presented

Section 47(b) of the ICA provides, in relevant part, that a contract that is made, or whose performance involves, a violation of the ICA “is unenforceable by either party.” It further states, subject to certain exceptions, that to the extent such a contract has been performed, “a court may not deny rescission at the instance of any party.” Section 47(b) does not, by its express terms, grant any party a right to bring suit. The Supreme Court’s ruling in FS Credit Opportunities addresses a question of fundamental importance to the investment management industry: whether Section 47(b) creates an implied private right of action for shareholders to bring suit seeking rescission of allegedly unlawful contracts. In a 6-3 decision, the Court found the answer is no.

The case arose from a challenge brought by Saba Capital Management, L.P. and its affiliates (“Saba”), a prominent activist investor, against several closed-end funds organized under Maryland law that had adopted resolutions opting into the Maryland Control Share Acquisition Act (“MCSAA”). The U.S. District Court for the Southern District of New York, following Second Circuit precedent established in Oxford University Bank that Section 47(b) creates an implied private right of action to sue for contract rescission, granted summary judgment in Saba’s favor. The Second Circuit summarily affirmed. The Supreme Court reversed that decision and remanded the case, holding that Section 47(b) is a directive to courts about their remedial authority, not a grant of a private right of action.

Activists’ Use of Section 47(b) to Challenge Defensive Measures

Saba and other activist investors have aggressively wielded Section 47(b) as a litigation tool to challenge various defensive measures adopted by closed-end fund boards in recent years. The activist strategy at issue involves identifying closed-end funds that are trading at a discount to net asset value (“NAV”), purchasing large stakes, and then using that position to alter the funds’ investment strategies or force “liquidity events”—such as tender offers, mergers with open-end funds, or fund liquidations—that allow the activist to capture as arbitrage profit the difference between the NAV discount at purchase and the price brought about by the liquidity event. This strategy can come at the expense of long-term investors, including retirees who value closed-end funds for their steady income streams. As of the end of 2024, Saba alone held positions in fully one-quarter of all closed-end funds in the market.

To protect against activists pursuing short-term goals at the expense of other investors, closed-end fund boards have adopted various defensive measures, including opting into state control share statutes like the MCSAA. Under the MCSAA, a shareholder who acquires shares sufficient to control at least 10% of a fund’s voting power cannot vote those shares above the threshold unless two-thirds of the remaining shareholders affirmatively approve. Other defensive measures included the adoption of majority vote standards to elect directors in contested elections and, in some cases, shareholder rights plans.

Saba challenged these measures by arguing they violated Section 18(i) of the ICA, which requires that “every share of stock . . . shall be a voting stock and have equal voting rights with every other outstanding voting stock.” Since Section 18(i) does not contain its own private enforcement mechanism, Saba used Section 47(b) as a vehicle to bring the actions, characterizing the fund bylaws adopting control share provisions as “contracts” and seeking their rescission on the theory that performance of these bylaws involved a violation of Section 18(i).

The Present Case

In June 2023, Saba sued sixteen closed-end funds in the Southern District of New York, seeking rescission of their control share provisions. The Funds (incorporated in Maryland) through their boards had adopted resolutions opting into MCSAA provisions that limit the ability of shareholders to vote the shares they hold in excess of the statute’s 10% threshold. The Funds argued, among other things, that Section 47(b) does not create an implied private right of action and that the SEC—not a private litigant—is the proper enforcer of the ICA’s substantive provisions.

The District Court, relying on the Second Circuit’s decision in Oxford University Bank, held that Section 47(b) does create an implied private right of action. The court also found that the control share provisions violated Section 18(i) and granted Saba summary judgment against eleven of the funds, with five funds dismissed on the basis of forum selection clauses requiring suit in Maryland. The Second Circuit summarily affirmed. The Supreme Court granted certiorari on June 30, 2025, to resolve the split among the circuit courts over whether Section 47(b) contains an implied private right of action.

The Supreme Court’s Rejection of an Implied Private Right of Action

The Supreme Court held that Section 47(b) of the ICA does not empower private parties to sue for rescission of contracts that allegedly violate the Act. The decision is grounded in three principal lines of reasoning: the text and structure of Section 47(b) itself, the broader enforcement scheme of the ICA, and the significance of the 1980 amendments that distinguished Section 47(b) from its companion provision in the Investment Advisers Act (“IAA”).

• Text and Structure of Section 47(b). The majority began with what it characterized as the foundational principle that “Congress, not the Judiciary, decides who may enforce the law,” and that when Congress creates a private right of action, it usually does so expressly. Applying this principle, the Court found that Section 47(b) is a “mandate directed to courts” rather than a provision that “confers a right on a specified class of persons.” In other words, the provision directs the court’s remedial authority when a controversy is already before it (e.g., in a state law case alleging fraud) rather than creating a cause of action.
• The ICA’s Enforcement Scheme. The majority emphasized that the ICA’s broader statutory structure confirms the absence of a private right of action under Section 47(b). Congress designated the SEC as the ICA’s primary enforcer, granting it the authority to investigate and bring enforcement actions. The Court reasoned that Congress’s decision to create a “comprehensive agency enforcement scheme” supports the conclusion that private parties generally cannot enforce the ICA. The Court contrasted the express private rights of action granted in other portions of the ICA, including Section 36(b), which expressly allows a shareholder to bring an action for breach of fiduciary duty with respect to the receipt of compensation, with the lack of the express grant in Section 47(b), finding that Congress “knew how” to create a private right of action to enforce the ICA “and did so expressly” in those instances.
• The 1980 Amendments and the Distinction from TAMA. A central piece of Saba’s argument relied on the Supreme Court’s 1979 decision in Transamerica Mortgage Advisors, Inc. v. Lewis (“TAMA”), which held that Section 215 of the IAA—then identical to Section 47(b) of the ICA—created an implied private right of action for rescission of a contract based on the phrase “shall be void.” Saba argued that because Section 47(b) originally mirrored Section 215 with the “shall be void” language, the TAMA holding applied equally. The majority acknowledged that if this were 1979, Saba would have a point. However, because Congress amended the ICA in 1980 and “entirely reworked” Section 47(b), including deleting the “shall be void” language (on which TAMA’s reasoning turned) in Section 47(b) but not the IAA, TAMA did not apply.

Consequences of Decision

The FS Credit Opportunities decision is a landmark ruling that will reshape the litigation landscape for registered funds, including closed-end funds and business development companies (“BDCs”), as well as the broader investment management industry. By definitively closing the “back door” to private enforcement of the ICA through Section 47(b), the Court has restored the SEC’s primacy as the enforcer of the ICA’s substantive provisions and eliminated a mechanism that plaintiffs had increasingly leveraged to challenge fund governance measures, advisory relationships, and operational contracts. The decision materially improves the litigation risk profile of investment management companies across multiple dimensions of their operations.

• Strengthened Anti-Takeover Defenses. The most immediate and significant consequence is the elimination of Section 47(b) as a litigation tool for activist investors. With the private right of action foreclosed, activists can no longer bring federal claims under Section 47(b) to dismantle these protective measures, such as control-share acquisition bylaws, majority voting standards, and other governance measures.
• Reduced Litigation Exposure Across Operations. The decision reduces the threat of private litigation over the full range of fund operations. Because investment companies generally externalize management, virtually every function—portfolio management, distribution, custody, transfer agency—is performed by a service provider under a written contract. Under the Second Circuit’s now-overruled framework, private plaintiffs could have sought rescission of any such service agreement by alleging a substantive ICA violation in the contract’s “performance.” As the ICI and SIFMA warned in their amicus positions to the Supreme Court, recognizing a private right of action would have handed a “skeleton key” to shareholders and the plaintiffs’ bar, effectively inviting them to serve as “private attorneys general to enforce the substantive provisions of the ICA alongside the SEC.” The ruling eliminates that exposure, allowing investment management companies to operate their contractual relationships without the threat that any alleged ICA misstep could give rise to a private rescission action.
• Greater Regulatory Certainty. The decision reaffirms that the SEC is the primary enforcer of the ICA, with private enforcement limited to the two express statutory rights of action under the ICA: Section 36(b) for excessive fee claims and the incorporated Securities Exchange Act provision for short-swing profit recovery. This preserves the stable regulatory framework, built on SEC rulemaking, exemptive orders, and no-action letters, that has governed the fund industry without the risk of contradictory judicial interpretations in private litigation. Investment management companies that have relied on SEC exemptive relief, no-action positions, or interpretive guidance in structuring their fund products and operations can do so with greater confidence that those arrangements will not be second-guessed by private litigants advancing novel theories of ICA violations. 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.
• Direct Applicability to Business Development Companies. Because Section 47(b) applies to BDCs through Section 59 of the ICA, the Court’s ruling directly eliminates the possibility of private parties suing BDCs for rescission of contracts under that provision. The ruling’s impact on BDCs is therefore coextensive with its impact on registered funds. Thus, BDCs that have adopted anti-activist governance measures receive the same protective benefit as traditional closed-end funds. The ruling also insulates BDC decisions regarding valuation, leverage (i.e., the asset coverage requirements under Section 61), and other capital structure choices from private rescission challenges under Section 47(b). This stability in governance and capital structure is especially valuable for BDCs that operate in illiquid asset classes and depend on long-term capital commitments, as the threat of private litigation seeking to unwind fundamental structural decisions had represented a material operational risk.

Investment management companies should bear in mind that, notwithstanding the favorable outcome in FS Credit Opportunities, significant legal and regulatory considerations remain. Accordingly, consultation with experienced legal counsel remains prudent before adopting or modifying anti-takeover defenses, governance measures, or other operational arrangements implicated by this decision.