Supreme Court Closes the Door on Private Lawsuits Under Section 47(b) of the Investment Company Act

By Jason Spitalnick and Joseph G. Adams

On June 11, 2026, the Supreme Court decided FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., No. 24-345, and held that Section 47(b) of the Investment Company Act of 1940 does not give private parties the right to bring their own lawsuits to unwind — or “rescind” — contracts that allegedly violate the Act. The decision resolves a long-running disagreement among the federal appeals courts, and eliminates the centerpiece of a litigation strategy that activist investors have used to attack the governance of closed-end funds.

It is now settled that, if a contract, bylaw, or board resolution allegedly violates the Investment Company Act, a private investor can no longer sue to rescind it under Section 47(b). Enforcement of the Act now rests primarily with the Securities and Exchange Commission.

The Investment Company Act of 1940 (the “ICA” or the “Act”) is the federal statute that governs pooled investment vehicles — mutual funds, exchange-traded funds, closed-end funds, and business development companies. If a fund gathers money from public investors and invests it in securities, the ICA almost certainly applies. The Act regulates nearly every aspect of how these funds operate: how their boards are composed, how much leverage they can use, how they deal with affiliates, and the voting rights their shares must carry.

Congress gave the SEC primary responsibility for enforcing the Act. Private investors can sue under only two of its provisions, and only one of those matters much in practice: Section 36(b), which lets shareholders sue a fund’s investment adviser for charging excessive fees. Everything else, in theory, is the SEC’s job.

This case dealt with Section 47(b) of the Act. It says that a contract whose making or performance violates the Act is “unenforceable by either party,” and that a court “may not deny rescission at the instance of any party” unless rescission would produce an inequitable result. The question before the Court: does that language allow a shareholder to file its own lawsuit demanding rescission?

For about two decades after the Supreme Court’s decision in Alexander v. Sandoval (2001), courts uniformly refused to read unwritten — or “implied” — private rights of action into the ICA, Section 47(b) included. Then, in 2019, the Second Circuit issued its decision in Oxford University Bank v. Lansuppe Feeder, LLC, holding that Section 47(b) authorizes private rescission suits.

Because the Second Circuit covers New York, where much of the fund industry litigates, that single decision opened the door to new litigation by activist investors. Activist investors, most prominently Saba Capital, had been trying to profit from these funds by buying a large position in a discounted fund, then pressuring the fund into share buybacks, liquidation, or a change of control that forces the share price up toward asset value and capturing the difference as profit. Fund boards responded with defensive measures — most notably by opting into state control-share statutes like the Maryland Control Share Acquisition Act, which strip voting rights from shareholders who cross an ownership threshold (say, 10%) unless the other shareholders vote to restore them. The point is to slow down rapid takeover campaigns.

After the Second Circuit’s decision in Oxford University Bank, Section 47(b) allowed the activists to launch their own suits directly at the funds. The lawsuits were premised on rescinding contracts. In particular, a fund’s bylaws and board resolutions are part of the contractual relationship between the fund and its shareholders; a control-share provision strips certain shares of equal voting rights in violation of Section 18(i) of the ICA; and a contract that violates the Act can be rescinded under Section 47(b). It was a creative use of a provision written for contract disputes, stretched to cover corporate governance measures — and in the Second Circuit, it worked.

The case decided today followed that script. Several closed-end funds organized under Maryland law adopted control-share resolutions; Saba sued in the Southern District of New York under Sections 18(i) and 47(b); the district court, bound by Oxford University Bank, ruled for Saba without a trial and ordered the resolutions rescinded; and the Second Circuit affirmed in a short, unpublished order. The Supreme Court took the case to resolve the circuit split.

Justice Barrett, writing for the Court, framed the case in separation-of-powers terms: “Congress, not the Judiciary, decides who may enforce the law.” And on the question whether Section 47(b) impliedly lets private parties sue for rescission, the opinion is blunt: “The answer is no.”

The Court read Section 47(b) as a provision about contract defenses and remedies, not a grant of the right to sue. On that reading, the provision does real work — a fund sued for breach of a contract that violates the ICA can invoke the contract’s unenforceability as a defense, and a court can order rescission when a party properly before it asks — but the right to bring the lawsuit in the first place has to come from somewhere else. The phrase “at the instance of any party,” the Court explained, means at the suggestion of a party already in court; it “say[s] nothing about conferring a right to sue in the first place.”

The Court also focused on Section 36(b), which does allow private suits. As the Court explained, when Congress wanted to authorize private suits under the ICA, it did so intentionally. Section 36(b) not only says shareholders may sue but spells out who bears the burden of proof, what damages are capped at, and what defenses apply. Section 47(b) has none of that machinery.

Justice Jackson dissented, joined by Justice Sotomayor and, in part, by Justice Kagan; she would have read the provision’s text, structure, and history to support a private right of action. Justice Kagan wrote separately on the proper role of legislative history. The decision continues the Court’s now-familiar reluctance to recognize implied causes of action.

Boards considering or maintaining defensive measures — control-share opt-ins, anti-activist bylaws, and similar provisions — can now evaluate those measures on the merits, without the immediate threat of a private federal rescission suit. To be clear, the substantive rules have not changed: Section 18(i) still requires equal voting rights, state-law fiduciary duties still apply, and the SEC can still enforce the Act. What changed is who can haul a fund into court over an alleged violation.

The ability to initiate a private lawsuit under Section 47(b) is now gone. Expect activists to focus on the remaining channels: proxy contests, state-law claims where available, and complaints urging the SEC to act.

The SEC is restored as the ICA’s primary enforcer, which means its interpretive positions — rules, exemptive orders, no-action letters, enforcement priorities — will carry even more practical weight, with no parallel private channel pressing competing readings of the statute. The ruling also reaches beyond closed-end funds: BDCs, private fund complexes that touch 1940 Act provisions, and their advisers all benefit from the elimination of Section 47(b) claims that might have targeted advisory agreements, borrowing facilities, or other operational contracts.

This decision does not affect Section 36(b) excessive-fee litigation, which remains the ICA’s principal express private cause of action. It does not make rescission categorically unavailable — where some other valid source of law supplies the right to sue, rescission remains a possible remedy.

Registered funds, business development companies, and the advisers and directors who serve them should take a fresh look at their litigation exposure and governance practices in light of the decision.