Supreme Court To Resolve Circuit Split Over Existence Of Implied Private Right Of Action Under Section 47(b) Of The Investment Company Act Of 1940

• Published date: 17 July 2025
• Law Firm: Goodwin Procter LLP
• Author: Mr Michael Isenman, Jennifer Burns Luz, James Fleckner, Charles A. Brown, Brianna Jordan and Isabel Marin

On June 30, 2025, the Supreme Court granted certiorari in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd.,¹ agreeing to resolve a circuit split over whether private parties have an implied right of action to enforce the Investment Company Act of 1940 (ICA), which governs mutual funds, closed-end funds, and other registered investment companies. For decades it has been well-understood that courts cannot create new private rights of action to enforce the ICA. In 2019, however, the Second Circuit departed from that consensus when it ruled that Section 47(b) of the ICA provides a private right of action to assert claims for alleged substantive violations of other sections of the ICA.² That ruling conflicted with decisions by the Third and Ninth circuits that rejected a private right of action under Section 47(b).³ And although Section 47(b) is, by its terms, limited to "contracts" that involve ICA violations, the plaintiffs' bar has made creative use of Section 47(b) in a variety of contexts (including challenges to corporate board resolutions and bylaws) that, although they involve contractual relationships, are not the most typical examples of contract disputes. To that point, FS Credit Opportunities itself involves a dispute in which an activist investor successfully brought an action under Section 47(b) to rescind board resolutions relating to a state anti-takeover statute.

Background

The Securities and Exchange Commission has authority to enforce the ICA, but private parties generally have no right to do so unless Congress has created such a right.⁴ For example, in enacting Section 36(b) of the ICA, Congress expressly authorized a "security holder" to bring "[a]n action" against a fund's investment adviser for "breach of fiduciary duty" regarding advisory fees.⁵ No other section of the ICA expressly authorizes private actions, and until the Second Circuit's 2019 decision, courts had rejected attempts by private parties to bring actions to enforce the ICA other than under Section 36(b).

The Supreme Court will now weigh in on the viability of a private right of action under Section 47(b), which provides, in relevant part:

(1) A contract that is made, or whose performance involves, a violation of [the ICA] ... 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 ICA].⁶

Until the Second Circuit's 2019 Oxford University Bank decision, courts interpreted this language not to create a new right of action but rather to provide a potential remedy (rescission) if a party already had a right of action.⁷ The Second Circuit nonetheless concluded that Section 47(b) "creates an implied private right of action for a party to a contract that violates the ICA to seek rescission of that violative contract."⁸ For procedural reasons, no party had standing to seek certiorari with respect to that aspect of the Second Circuit's 2019 decision, and no other circuit subsequently joined the Second Circuit's side of the split.

Although Section 47(b), by its terms, applies only to the rescission of contracts, plaintiffs have attempted to bring actions under Section 47(b) in various contexts outside of contract disputes, such as purchases of securities and challenges to corporate anti-takeover provisions.

FS Credit Opportunities provides a...