Supremes Limit Plays Investors Can Run Against RICs: Resolve Circuit Split on Section 47(b) Private Rights of Action

In June 2026, the U.S. Supreme Court held in FS Credit Opportunities Corp. v. Saba Capital Master Fund Ltd. that Section 47(b) of the Investment Company Act of 1940 (1940 Act) does not impliedly empower private parties to sue for rescission of contracts that allegedly violate the act.

Disputes on the Field

Saba Capital Master Fund Ltd. and related entities brought suit in the Southern District of New York against certain closed-end registered investment companies, known as closed-end funds. Saba is among what are sometimes referred to as “activist investors,” and sought the rescission of board resolutions pursuant to which the closed-end funds had subjected themselves to a so-called control share statute enacted by their state of incorporation. In our article titled “Gone With the Wind? Closed-End Funds Risk Extinction,” we described how closed-end funds commonly have in place control share and other provisions intended to protect against conduct by activist investors that may be detrimental to the interests of other investors in those funds. As we also mentioned, closed-end funds, generally, have found that such provisions have served their purpose only to a limited extent.

In any event, Saba asserted that the control share voting provisions violated a 1940 Act requirement that, with various exceptions, all shares of a registered investment company have the same voting rights. At the district court level, Judge Jed S. Rakoff held that Saba had an implied right under Section 47(b) to maintain its action to rescind the control share voting provisions. The Second Circuit affirmed this holding, which was consistent with a prior decision in that circuit that had found an implied private right of action for rescission under Section 47(b) but inconsistent with the law in several other federal circuits, where the existence of such an implied right had been rejected. The closed-end funds then petitioned for certiorari on this point, which the Supreme Court granted.

For more information about the implications of this dispute, please refer to our article titled “Can Shareholders Rescind an Investment Company’s Contracts Based on 1940 Act Violations?”

Ruling From Up in the Booth

The Supreme Court ruled 6–3 in favor of the closed-end funds (with the three Democratic-appointed justices dissenting). Writing for the majority, Justice Amy Coney Barrett did acknowledge that Saba’s arguments in support of an implied right of action — which were based on both the statutory language and legislative history — were “not without force,” though the majority ultimately found them unpersuasive.

The opinion discusses how the Supreme Court in recent decades has become, as a general matter, more parsimonious in inferring private rights of action in federal statutes and less influenced by certain types of legislative history — and the current majority gives no evidence of reversing course in these regards. Accordingly, the court refused to find an implied right of action in Section 47(b), notwithstanding that: (i) Section 47(b)(1) includes language to the effect that a contract that is made, or whose performance involves, a violation of the 1940 Act “is unenforceable by either party” to the contract (subject to certain exceptions), and (ii) Section 47(b)(2) includes language to the effect that, if such a contract has already been performed, “a court may not deny rescission thereof at the instance of any party” (again, subject to exceptions).

Even though Section 47(b)(2), at least, thus specifically mentions “rescission,” the court explained that the function of Section 47(b)(2) is to override a common law principle that limits the remedy of rescission in cases where the contract in question has already been performed. According to the opinion, therefore, Section 47(b)(2) is merely an instruction to the adjudicator that expands the scope of any otherwise valid cause of action a party may have for rescission but that does not otherwise create or imply any additional right of rescission for any party.

The majority’s decision in this case also may have been influenced by the potentially enormous volume and breadth of the litigation that might develop if private actions under Section 47(b) were permitted. The great bulk of all the activities in which closed-end funds and other registered investment companies engage are conducted via contracts with various service providers. If the court had upheld private rights of action pursuant to Section 47(b)(2), therefore, plaintiffs’ lawyers could perhaps bring troublesome lawsuits seeking rescission of one or another contract relating to almost any 1940 Act violation, plausible or not, that they could dream up. The court’s opinion, however, does not elaborate that point, but merely includes a brief sentence to the effect that Saba’s proposed interpretation could enable it “to void any type of contract that violates” the 1940 Act and characterizes that as “a sweeping right.”

Game Not Over

Although this is an important case, the extent to which registered investment companies are subject to private actions and can impose control share (or similar) protections is far from entirely settled. Neither the SEC nor the courts have definitively ruled upon the extent to which such protections are inconsistent with the 1940 Act or any other federal securities law provisions.

Moreover, some have suggested that, rather than relying on Section 47(b), activist investors may attempt to reframe their legal challenges as causes of action under Section 47(a), which was not addressed by the court’s opinion in Saba. Private investor challenges might also be possible based on, for example, certain provisions of state corporation law or breaches of fiduciary duty or other common law principles.

So there is at least some time left on the clock, and everyone should not head for the showers just yet.