A Supreme Court Win for Fund Investors — and the Work That Remains

The Supreme Court has handed regulated funds and the nearly 130 million Americans who invest in them a decisive victory. In FS Credit Opportunities Corp. v. Saba Capital Master Fund, the Court held 6–3 that Section 47(b) of the Investment Company Act of 1940 does not create an implied private right of action, confirming that responsibility for enforcing the statute rests where Congress placed it: with the Securities and Exchange Commission.

Recently, ICI convened the Skadden litigation team that argued and won the case for a members-only webinar to discuss the decision and what comes next for funds. 

What was at stake

Section 47(b) addresses when courts may rescind, or cancel, contracts whose performance involves a violation of the '40 Act. Because nearly everything an externally managed fund does runs on contracts, a private right to sue for rescission could potentially have let plaintiffs challenge virtually any fund practice as violating any provision of the statute. ICI's amicus briefs called it a skeleton key: an unassuming tool that fits every lock in the statute, letting private plaintiffs force their way into matters Congress reserved for the SEC.

The threat was not hypothetical. Activist hedge fund Saba Capital had invoked Section 47(b) to attack defenses that closed-end funds adopted to protect shareholders from campaigns seeking a quick payout at the expense of long-term investors. Nearly any fund agreement, be it advisory, distribution, custody of administration, could have become a rescission target. Further, had activists prevailed, the SEC exemptive orders and interpretive positions underpinning those arrangements could have been open to second-guessing by private litigants in courtrooms across the country.

ICI's role

This outcome did not happen on its own. ICI filed two amicus briefs, with the first urging the Court to take the case and the second on its merits. After the Court sought the views of the Solicitor General, ICI engaged with the SEC and the Solicitor General's office as the government weighed its position, and the United States ultimately filed in support of the funds, revisiting a view the agency had expressed two decades earlier. 

The Outcome

The Court's reasoning tracks the arguments ICI advanced: the SEC is the Act's primary enforcer, and Congress's creation of two express private rights of action elsewhere in the statute shows it knew how to create one in Section 47(b) and chose not to.

Writing for the majority, Justice Barrett explained that rescission is a remedy, not a cause of action. Section 47(b) instructs courts on how to treat parties already properly before them, but it confers no right to sue. 

Not out of the woods

Members should not mistake this victory for the end of activist litigation. The Court decided only who may sue — not whether funds’ defensive measures comply with the '40 Act, a question Saba is claiming it will continue to press publicly. 

The panelists expect activists to keep testing other legal routes. One is state court: activists can bring claims there that adoption of shareholder defensive measures by the fund board breached its fiduciary duties to shareholders — without needing any federal right to sue. The consolation is that these claims are worse routes for activists: slower, costlier, requiring engaging in discovery, and, unlike a Section 47(b) question of law, force activists to open their own books and strategies to scrutiny to determine the factual record. Another is to try to repackage the prior litigation under Section 48(a) or 36(b) of the ’40 Act, but the arguments seem tenuous for those paths. 

Of course, the SEC could always bring its own Section 47(b) challenge, but the SEC has taken a clear position on the appropriateness of control shares defenses. However, SEC staff positions are not a fortress: staff had previously objected to control-share defenses, but then withdrew that objection in 2020. Future SEC leadership could take a different position on the matter.

The durable fix

That last point underscores the case for legislation. Staff guidance can be withdrawn and litigated around; a statute cannot. Congress has made progress with a more permanent solution: the INVEST Act, passed by the House in December with an overwhelming bipartisan majority, would, among other provisions, close the loophole that lets activist hedge funds build controlling stakes in closed-end funds by spreading their purchases across related funds. ICI commended House passage and continues to urge the Senate to take up this legislation. Further, there are reform proposals around annual meeting requirements before the SEC that would negate activist attacks.

The Court has closed the '40 Act's litigation back door. Congress and the SEC should now lock the front one.