On December 10, 2025, the U.S. Supreme Court heard arguments in FS Credit Opportunities Corp. v. Saba Capital Master Fund Ltd. to resolve a circuit split over whether investors have a private right of action under Section 47(b) of the Investment Company Act of 1940, as amended. The case centers on closed-end fund bylaws adopting Maryland “control-share” voting limitations and has broad implications for funds that fall, directly and indirectly, under the 1940 Act.
The Supreme Court granted certiorari to decide whether Section 47(b) of the 1940 Act includes an implied private right of action allowing private litigants to seek rescission of contracts that allegedly violate the 1940 Act. The question comes to the Court following decisions in the Second Circuit that recognize a private right of action, in contrast to decisions from the Third and Ninth Circuits, which have found no private right of action under Section 47(b).
By resolving this circuit split, the Court’s decision could materially affect investors’ ability to sue funds directly over allegedly unlawful contracts.
Litigation Background
The dispute stems from challenges brought by Saba Capital to several closed-end funds organized under Maryland law. Those funds adopted bylaws opting into certain voting rights provisions under the Maryland Control Share Acquisition Act (MCSAA). Under the MCSAA, once a shareholder acquires at least 10% of a fund’s shares, the shareholder is prohibited from voting shares above that threshold unless two-thirds of the remaining shareholders affirmatively approve the additional voting rights.
Saba Capital filed a declaratory judgment action in the Southern District of New York, asserting that the voting rights provisions violated Section 18(i) of the 1940 Act, which requires that every share of stock issued by a fund subject to the Act be a voting stock with equal voting rights.
Before Saba’s suit, the Second Circuit held as an issue of first impression in Oxford University Bank v. Lansuppe Feeder LLC that the 1940 Act contains an implied private right of action for rescission under Section 47(b). Relying on that precedent, the district court granted summary judgment in Saba’s favor, rescinded the challenged contracts, and found that the voting rights provisions violated the 1940 Act. On appeal, the Second Circuit affirmed, creating a split with the Third and Ninth Circuits.
Key Legal Issues Before the Court
The Supreme Court granted review to decide whether Section 47(b) of the 1940 Act contains an implied private right of action for rescission.
Recent Supreme Court precedent has closely scrutinized statutory language and required unambiguous congressional intent to create a private right of action. The Court may also address the applicability of its decision in Transamerica Mortgage Advisors v. Lewis, which found an implied right of action for rescission under the Investment Advisers Act of 1940, a statute enacted with the 1940 Act.
The parties and amici have advanced competing views on whether Section 47(b) supports a private right of action.
Potential Implications for Market Participants
A decision recognizing a private right of action under Section 47(b) could materially expand funds’ litigation exposure. As amici, including the U.S. Chamber of Commerce, have argued to the Supreme Court, with an implied private right of action, private litigants would likely have the opportunity to challenge a vast array of an investment company’s contracts, including governance documents and bylaws, advisory and sub-advisory agreements, securities issuances, and contracts with service providers and other third parties.
The decision could also affect shareholder engagement dynamics for closed-end funds and business development companies (BDCs) and could indirectly affect private fund structures if 1940 Act provisions are implicated. Because Section 47(b) does not contain a statute of limitations, there is a significant risk that companies could face retrospective rescission and related collateral consequences. For long-standing companies, assessing this risk may require examination of its internal structures, investment history, and contractual arrangements.
Bottom Line
The Supreme Court’s decision in FS Credit Opportunities could significantly reshape the enforcement landscape under the 1940 Act by either opening or closing the door to private rescission claims under Section 47(b). Registered funds, BDCs, private fund complexes, and their counterparties should consider proactively assessing contractual portfolios, governance frameworks, and disclosure practices to prepare for either outcome and be ready to implement responsive measures once the decision is issued.
If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds team.
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