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On June 30, 2025, the U.S. Supreme Court granted certiorari in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd. to resolve a circuit split over whether there is a private right of action for shareholders under Section 47(b) of the Investment Company Act of 1940 (ICA). The ICA regulates mutual funds, exchange-traded funds, closed-end funds, and other registered investment companies. Section 47(b) of the ICA says a contract that violates the ICA "is unenforceable by either party." Congress empowered the SEC with enforcement of the ICA, with two narrow exceptions for private enforcement unrelated to Section 47(b). However, in 2019, the Second Circuit, in Oxford University Bank v. Lansuppe Feeder, LLC,1 recognized an implied private right of action under Section 47(b) for the first time. In contrast, the Third and Ninth Circuits previously rejected finding a private right of action under Section 47(b).
Since the Second Circuit's ruling, activist investors have brought suits to challenge closed-end funds' actions as violating other provisions of the ICA. Activist investors can deploy an arbitrage strategy where they invest in closed-end funds, gain control over the fund, and then use that control to initiate investment or structural actions that allow the activist investor to sell their shares at a higher price. Bringing an action under Section 47(b) provides activist investors with a valuable tool to deploy an arbitrage strategy and obtain short-term profits. Indeed, at issue in Saba was the use of Section 47(b) to challenge the funds' adoption of the Maryland Control Share Acquisition Act, which makes it more difficult for shareholders to buy a controlling stake of a fund.
On September 3, 2025, the United States and U.S. Chamber of Commerce weighed in and filed amicus briefs in support of the fund petitioners seeking to challenge the private right of action. The government agreed with the funds that no private right of action existed under Section 47(b). The Chamber of Commerce agreed and argued that recognizing a private right of action "would unleash crippling and unchecked private lawsuits aimed at enforcing the ICA's extensive requirements and seeking to rescind vital business contracts."
The outcome of the Supreme Court's decision will have a significant impact on closed-end funds. If the Supreme Court sides with the activist investors, funds may be flooded with private actions, even if the SEC previously took no issue with the alleged violation of the ICA. On the other hand, if the Supreme Court sides with the funds, it will provide funds with greater regulatory certainty by maintaining the SEC as the primary enforcer of the ICA, with two narrow private right exceptions.
The Supreme Court's decision in Saba is expected by June 2026.
Footnote
1 933 F.3d 99 (2d Cir. 2019).
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