(Article from Registered Funds Regulatory Update, July 2025)
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On June 30, 2025, the U.S. Supreme Court granted four closed-end funds’ petition for a writ of certiorari, asking the Supreme Court to address whether Section 47(b) of the 1940 Act gives shareholders of registered investment companies a private right of action to bring lawsuits to rescind contracts that violate the 1940 Act. The Supreme Court’s decision could have far-reaching consequences on the registered fund industry, as Section 47(b) addresses the enforceability of contracts made in contravention of the 1940 Act and the rules thereunder and remedies related thereto. Specifically, under Section 47(b), a contract violating the 1940 Act or whose performance violates the 1940 Act is “unenforceable” and, to the extent such contract has been performed, the remedy is to rescind the contract subject to certain limitations.
Saba’s Lawsuit
By way of background, in 2023, Saba Capital, a well-known activist investor, filed a lawsuit against the four Petitioners, including FS Credit Opportunities Corp., in the U.S. District Court for the Southern District of New York, claiming that each Petitioner’s adoption of a Maryland law “designed to make it more difficult for outside investors to gain control of the fund through shareholder voting rights” violated the 1940 Act. Under the Maryland Control Share Acquisition Act, if the board of a closed-end fund registered under the 1940 Act, like each Petitioner, adopts a resolution to become subject to the Act, then a person otherwise controlling at least 10% of shareholder voting power in such Maryland fund would not have voting rights “‘with respect to the control shares’ unless approved by a two-thirds vote of other shareholders” (emphasis added).
Saba is well-known in the market for its investment strategy targeting funds, such as Petitioners, “…that trade at prices below … current per-share net asset values, and then … pressur[ing] the funds to make changes that will cause share prices to rise.” Consistent with this strategy, Saba began acquiring significant stakes in Petitioners, each of which were trading at prices below their respective NAVs, prior to filing the lawsuit at issue in 2023. Noting their increasing ownership, each of Petitioner’s boards voted to opt into the Act, thereby subjecting Petitioner’s shareholders to the Act’s 10% voting limitation trigger, subject to override only by a vote of two-thirds of the other shareholders. Pointing to this, Saba argued that the resolutions approving the change and the bylaws reflecting such change violated Section 18(i) of the 1940 Act, which requires, in relevant part, that “every share of…a registered management company…be a voting stock and have equal voting rights with every other outstanding voting stock…”, and sought rescission of the resolutions in reliance upon a purported private right of action granted to them under Section 47(b) of the 1940 Act.
The District Court granted summary judgment for Saba, ordering that the resolutions be rescinded. In deciding for Saba, the Court concluded that (i) Section 47(b) creates a private right of action with respect to contractual obligations alleged to violate the 1940 Act and parties to such contracts may therefore “seek rescission of that violative contract”; (ii) the resolutions approved by Petitioners’ boards had the effect of amending the respective Petitioner’s bylaws (as discussed further below), and such bylaws “constitute a contract between the corporation and its shareholders”; and (iii) therefore, the resolutions at issue (and the amended bylaws), which Saba argued were in violation of Section 18(i) (as discussed further below), were subject to rescission and were “rescinded forthwith.”
Upon appeal, the Second Circuit Court of Appeals affirmed the District Court decision, albeit in an unpublished summary order, meaning that while the Court of Appeals agreed with Saba’s arguments regarding the Section 18(i) violation and determined the District Court had not “abuse[d] its discretion by granting rescission” under Section 47(b), it “did not otherwise address whether Section 47(b) confers a private right of action.” However, in a 2019 decision, the Second Circuit had previously held that Section 47(b) “creates an implied private right of action for a party to a contract that violated the [1940 Act] to seek rescission of that violative contract”, reasoning, for example, that, while Section 47(b) may not explicitly confer such a private right, the statutory language of the section is “effectively equivalent to providing an express cause of action.”[1]
The Second Circuit’s holding in Oxford University Bank and decision at issue for Petitioners created a circuit split amongst the Second Circuit Court of Appeals and the Third, Fourth, and Ninth Circuit Courts of Appeals,[2] which reached the opposite conclusion with respect to Section 47(b)—that it does not create an implied private right of action. The Third and Ninth Circuits reasoned, for example, that neither the language nor structure of the 1940 Act indicate Congressional intent to create such a right and that Section 47(b) merely establishes that contracts formed in violation of the 1940 Act are usually unenforceable. Petitioners argued that this Circuit split and the issues identified at the District Court level raise an important question of federal law warranting the Supreme Court’s review.
United States Amicus Brief
On May 22, 2025, the Solicitor General of the United States’ office filed a brief urging the Court to hear Petitioners’ case and settle the question as to whether Section 47(b) creates a private right of action, such that private investors can sue funds directly for contractual rescission. The government’s brief contends that Section 47(b) lacks rights-creating language in contrast to other 1940 Act provisions, which expressly create private rights of action (thereby evidencing Congressional intent to do so), including, for example, Section 36(b), added to the 1940 Act in 1970, relating to breach of fiduciary duty claims (e.g., “[a]n action may be brought under this subsection by the Commission, or by a security holder of such registered investment company on behalf of such company…”). The government’s brief goes on to note a relevant shift in case law, also beginning in the 1970s, whereby the Supreme Court “‘adopted a far more cautious’ approach to implied rights of action,” shifting to “stress[] that Congress should speak in ‘explicit terms’ if it wishes to authorize private suits”,[3] a point reiterated in 2023 when the Supreme Court emphasized that Congress must speak “‘unambiguously’ if it wishes to create such judicially enforceable rights.”[4] Pointing to Section 47(b) itself, the brief goes on to highlight a 1980 amendment to the Section, which updated the provision to replace an affirmative assertion that violative contracts “shall be void”—a phrase which the Supreme Court previously determined in a 1979 Advisers Act case[5] creates a private right of action—with “unenforceable”. Looking at this intentional change, the government argues it is inappropriate to imply a private right of action for Section 47(b) because, among other things, (i) Congress was not explicit in its language creating that right and thereby Congressional intent is unclear at best, and (ii) the 1980 amendment to Section 47(b) eliminated any basis for applying the Supreme Court’s holding and reasoning from the 1979 Advisers Act case, which would otherwise create an implied private right of action based on the Supreme Court’s construction of the “shall be void” language at issue in that case. The government’s brief goes on to argue that reading in an implied private right of action for Section 47(b) suits could interfere with SEC enforcement discretion, cause confusion in the industry, and, overall, have untold impact on investment fund operations.
Supreme Court Grants Certiorari
Having granted certiorari on June 30, 2025, the Supreme Court will prepare to hear the case in the 2025-2026 term and address the question of whether private investors can continue using Section 47(b) to challenge fund governance decisions.
FS Credit Opportunities Corp. et al. v. Saba Capital Master Fund, Ltd., et. al., No. 24-345
(U.S. June 30, 2025).
Brief for the U.S. as Amicus Curiae, FS Credit Opportunities Corp. et al. v. Saba Capital Master Fund, Ltd., et al., No.24-345 (May 22, 2025).
[1] Oxford Univ. Bank v. Lansuppe Feeder, LLC, 933 F.3d 99 (2d Cir. 2019).
[2] See, e.g., Santomenno ex rel. John Hancock Trust v. John Hancock Life Ins. Co., 677 F.3d 178 (3d Cir.), cert. denied, 568 U.S. 978, and 568 U.S. 979 (2012); UFCW Local 1500 Pension Fund v. Mayer, 895 F.3d 695 (9th Cir. 2018); Steinberg v. Janus Capital Mgmt., LLC, 457 Fed. Appx. 261 (4th Cir. 2011).
[3] See, e.g., Ziglar v. Abbasi, 582 U.S. 120, 132-133 (2017); Alexander v. Sandoval, 532 U.S. 275, 288-289 (2001); Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 535-36 (1984); Cort v. Ash, 422 U.S. 66, 79-85 (1975).
[4] Health & Hosp. Corp. v. Talevski, 599 U.S. 166, 180 (2023); cf. Gonzaga Univ. v. Doe, 536 U.S. 273, 290 (2002) (requiring “clear and unambiguous terms”).
[5] Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11 (1979).