On June 30, 2025, the U.S. Supreme Court granted certiorari in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd.[1] in order to resolve a split among U.S. Circuit Courts of Appeals regarding whether Section 47(b) of the Investment Company Act of 1940 creates an implied private right of action to rescind contracts for alleged violations of any provision of the Investment Company Act.  Generally, only the SEC has the authority to enforce the Investment Company Act, with the exception of Section 36(b) of the Investment Company Act which expressly establishes a private right of action that allows shareholders of a registered fund to bring suits, on behalf of the fund, alleging breaches of fiduciary duty with respect to compensation paid by the fund or its shareholders to the fund’s investment adviser or its affiliates.  While several Circuit Courts, including the Third and Ninth Circuit Courts, have previously held that Section 47(b) does not create an implied private right of action, in 2019 the Second Circuit Court of Appeals in Oxford University Bank v. Lansuppe Feeder, LLC held that Section 47(b) provides an implied private right of action. 

Section 47(b) of the Investment Company Act provides, in relevant part, that:

(1) A contract that is made, or whose performance involves, a violation of [the Investment Company Act] . . . is unenforceable by either party . . . (2) To the extent that a contract described in paragraph (1) has been performed, a court may not deny rescission 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 Investment Company Act].

Since the Oxford University Bank decision, closed-end fund activist investors have sued numerous registered closed-end funds under Section 47(b) in an effort to rescind certain of the funds’ anti-takeover measures, including opting into state control share statutes (e.g., the Maryland Control Share Acquisition Act (MCSAA)) and requiring a majority instead of a plurality vote in contested director elections, claiming that such measures affect a contractual relationship with fund shareholders,.

FS Credit Opportunities Corp. involves closed-end funds registered under the Investment Company Act and organized under Maryland law.  As an anti-takeover measure, each fund’s board adopted resolutions opting into the MCSAA, thereby limiting the ability of fund shareholders to vote their shares to the extent their ownership of fund shares exceeded a certain threshold.  This measure limited the ability of activist investors owning a large number of shares to affect director elections and take control of the funds’ boards. Saba, an activist investor in the funds, sued the funds in the U.S. District Court for the Southern District of New York, seeking rescission of the control share resolutions pursuant to Section 47(b) of the Investment Company Act.  Saba alleged that in opting into the MCSAA, the funds violated Section 18(i) of the Investment Company Act, which provides that “every share of stock . . . issued by a registered management company . . . shall be a voting stock and have equal voting rights with every other outstanding voting stock . . . .”  The U.S. District Court for the Southern District of New York, citing Oxford University Bank, granted summary judgment in favor of Saba and ordered the rescission of the control share resolutions.  On appeal, the Second Circuit affirmed the decision of the District Court.

The Investment Company Institute (ICI) submitted an amicus curiae brief in support of the petition for certiorari, arguing that “[t]he availability of a private right of action under Section 47(b) . . . risks upending the long-established regulatory structure governing the registered fund industry, causing significant regulatory uncertainty and wasteful litigation.”  Noting that the Investment Company Act granted sole enforcement authority to the SEC, the ICI warned that a private right of action to enforce substantive provisions of the Investment Company Act could result in a “flood of new litigation” and lead to interpretations of the Act in conflict with those of the SEC upon which registered funds and their boards rely.

The Supreme Court docket, which includes the funds’ petition for writ of certiorari and the ICI’s amicus curiae brief, is available here.