Supreme Court Rejects Implied Private Right of Action for Contract Rescission in Investment Company Act

On June 11, 2026, the Supreme Court held that Section 47(b) of the Investment Company Act of 1940 (“1940 Act”) does not contain an implied private right of action permitting investors to sue for rescission of any contract that allegedly violates the 1940 Act.  The Court’s opinion in FS Credit Opportunities Corp. v. Saba¹ should reassure funds regulated under the 1940 Act—as well as their directors, investment advisers, and other contracting counterparties—by restoring regulatory predictability and curtailing the litigation leverage tools available to activist investors and the plaintiffs’ bar.²

Background

Section 47(b) of the 1940 Act permits rescission of any contract that allegedly violates the 1940 Act as a remedy to parties to such a contract, provided that rescission would not produce a more inequitable result than performance.³ In recent years, however, activist investors and other enterprising litigants have invoked Section 47(b) as an affirmative basis to bring litigation in the hopes of obtaining a court order to rescind contracts that funds have entered into—principally investment advisory agreements and bylaw amendments.

In bringing these claims, these litigants have argued that Section 47(b) implicitly created a private right of action for rescission—available not just to parties to the contract, but to any investor affected by it.  In 2019, the U.S. Court of Appeals for the Second Circuit first accepted this theory in Oxford University Bank v. Lansuppe Feeder.⁴  That decision conflicted with decisions from other circuits, including the Third Circuit, creating a circuit split ripe for Supreme Court review.⁵

The present case provided the Supreme Court with a suitable vehicle for review.  Saba Capital filed suit in the United States District Court for the Southern District of New York, alleging that the defendant-funds adopted resolutions under Maryland state law in violation of the 1940 Act.  The District Court granted Saba’s motion for summary judgment and rescinded the funds’ resolutions under Section 47(b), relying on Oxford University Bank.⁶ In a summary opinion, the Second Circuit affirmed the District Court, with little discussion of Section 47(b).⁷  The funds then petitioned for a writ of certiorari, presenting a single question: whether Section 47(b) contains an implied private right of action.⁸

The Supreme Court’s Decision

On June 11, the Supreme Court resolved the circuit split and abrogated the Second Circuit’s interpretation of Section 47(b).  In a 6-3 decision, Justice Barrett—writing for the majority—looked to Supreme Court precedent and traditional tools of statutory interpretation to conclude that Congress did not create an implied private right of action within Section 47(b).

Justice Barrett found that the plain text of Section 47(b) lacked the hallmarks of a provision creating an implied private right of action: it contained no “rights-creating language,” was not written to protect “a particular class of persons,” and Congress had established an alternative, comprehensive enforcement mechanism—SEC oversight.⁹ Rather, the Court held that Section 47(b)’s “rescission” language authorized a remedy that a court may order (for example, as a defense in a state-law breach-of-contract action, or as relief under state-law rescission claims), not a statutory right granted by the 1940 Act to all fund investors.¹⁰ The Court also rejected Saba’s argument that the Court’s 1979 decision in Transamerica Mortgage Advisors¹¹—which recognized a private right of action under the Investment Advisers Act—compelled the same result under Section 47(b) of the 1940 Act.¹² In sum, the majority held that Section 47(b) makes rescission available as a remedy; it does not create a sweeping federal right for either parties or non-parties to a contract to sue for rescission based on an alleged underlying violation of another 1940 Act provision.

Justices Kagan and Jackson each wrote separately in dissent. Justice Jackson’s dissent focuses primarily on her view that legislative history is a valuable tool of statutory interpretation—a position the majority sharply disagreed with.¹³ Applying legislative history, Justice Jackson concluded that Section 47(b) does contain an implied private right of action.¹⁴  Justice Kagan took a position between the majority and Justice Jackson on the use of legislative history, but concluded on the basis of the text and structure of Section 47(b) that the provision does create a private right of action.¹⁵

Implications of this Decision

The FS Credit Opportunities decision yields several concrete benefits for funds, their directors, contracting counterparties, and investors.¹⁶ The decision vindicates Congress’s design for fund oversight under the 1940 Act—entrusting independent fund directors and the SEC, together, with effective and efficient oversight in a way that protects shareholder interests. The decision also curtails the ability of the plaintiffs’ bar and activist investors to engage in repeat and spurious second-guessing of all independent directors’ decisions, freeing funds to operate in the best interests of all investors rather than only the most litigious.  And most significantly, the decision eliminates a primary mechanism that activist investors have sought to use to circumvent both the SEC’s regulatory authority and the business judgment of funds’ independent directors.

Registered investment companies contract for virtually all services necessary to operate, and a private right of action under Section 47(b) would have exposed the full range of those agreements—including advisory, underwriting, custody, and transfer agent contracts—to rescission suits premised on any alleged 1940 Act violation.  That exposure would have invited opportunistic challenges and threatened the orderly operation of funds and the trillions of dollars entrusted to them by shareholders.  The risk extended to contracts and actions taken in reliance on SEC staff guidance and no-action letters, which private litigants could have challenged even where both the SEC staff and independent directors had concluded that the relevant conduct served shareholders’ best interests.

But following the Court’s decision in FS Credit Opportunities, funds now have clarity that Section 47(b) cannot serve as the basis for a standalone federal private right of action—eliminating a primary litigation vehicle that the plaintiffs’ bar and activist investors had sought to wield against fund contracts.

That said, the threat of activist shareholder litigation is likely to persist through other, more narrow avenues. Unlike Section 47(b), which was amended in 1980 to remove the “shall be void” language on which the Court’s 1979 TAMA decision had rested, Section 47(a) of the 1940 Act retains that language.¹⁷ The activist investor in this case, Saba Capital, indicated in its briefing that it intends to argue on remand that Section 47(a) provides a private right of action for “rescission of 1940 Act-violative bylaws provisions,” such as those at issue in the underlying litigation.¹⁸ Funds, advisers and directors should continue to consult with experienced counsel in assessing this and other important developments that impact litigation risk.