Supreme Court Shuts the Door on ICA Rescission Claims: What Closed-End Fund Managers Need to Know

On June 11, 2025, the U.S. Supreme Court decided FS Credit Opportunities Corp., et al. v. Saba Capital Master Fund, Ltd., et al. (24-345), holding that Section 47(b) of the Investment Company Act of 1940 (ICA) does not create an implied right of action for rescission.

Typically enforced by the Securities and Exchange Commission (SEC), the ICA governs mutual funds and other registered investment companies. With two exceptions, no section of the ICA expressly authorizes a private right of action. The question presented was whether private parties have an implied right of action under Section 47(b) to sue for rescission of contracts that allegedly violate the ICA. In line with its recent reluctance to find implied private rights of action, a six-justice majority of the Court held the answer is “no.”

Background

In 2023, activist investor Saba Capital (Saba) sued several closed-end mutual funds (the Funds) that had adopted “control share provisions” under Maryland law that diluted investors’ voting shares. Saba alleged that depriving shareholders of their voting rights violated Section 18(i) of the ICA.¹ Arguing that the control share provisions also affect the Funds’ and shareholders’ contractual relationship, Saba sought rescission pursuant to Section 47(b) of the ICA, which provides that contracts that violate the ICA are “unenforceable by either party.” 15 U.S.C. § 80a-46(b)(1). Saba argued Section 47(b) also provides a right of action via the provision that “a court may not deny rescission at the instance of any party” absent certain findings.

Saba’s arguments relied heavily on the 1979 Supreme Court decision in Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11 (1979) (TAMA), which held there was an implied private right of action for rescission in a parallel provision of a related statute, the Investment Advisers Act of 1940 (IAA). Section 215(b) of the IAA provides that contracts that violate the statute “shall be void,” thereby authorizing rescission of such contracts. 15 U.S. Code § 80b-15(b). Saba pointed to both statutes’ legislative history, as they were enacted together. After TAMA, Congress amended 47(b) of the ICA to include that a court “may not deny rescission at the instance of any party” absent certain findings.² 15 U.S. Code § 80a-46(b)(2) (emphasis added). Saba argued this language provides a limited private right to seek rescission of a contract that violates the ICA.³

Opinion

Writing for the majority, Justice Amy Coney Barrett held that Section 47(b)’s phrase “rescission at the instance of any party” does not imply that private parties may sue. (Op. 5). Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito, Neil Gorsuch, and Brett Kavanaugh joined the majority.

The majority explained that Section 47(b)’s provision is a “mandate directed to … courts” and does not confer a right to individuals. Id. (citation omitted). “Section 47(b)’s wording thus presupposes that parties are already before the court and directs the court’s use of its remedial authority.” Id. The majority emphasized that under contract law, rescission is a remedy rather than a cause of action. Citing the statutory structure, the majority also noted that the SEC is the ICA’s main enforcer and that the act already expressly authorizes two private rights of action for other sections of the ICA: (1) for shareholders to sue investment advisors for certain breaches of fiduciary duty (15 U.S. Code § 80a-35(b)), and (2) for securities holders to sue certain insider defendants to recover short-swing profits (15 U.S. Code § 80a-29(h)). Thus, “nothing in the text or structure of the ICA indicates that Congress authorized private parties to enforce virtually every provision in the statute.” (Op. 8).

The majority also rejected Saba’s reliance on TAMA and statutory history, finding that Congress’ amendments distinguish Section 47(b) from Section 215 of the IAA. The most significant change according to the majority was Congress’ deletion of the phrase “shall be void” from Section 47(b), which is the language on which TAMA turns and which remains in Section 215. Accordingly, the majority found that Congress’ amendments “were a renovation, not a new coat of paint.” (Op. 10).

Justice Ketanji Brown Jackson, joined by Justice Sonia Sotomayor in full and Justice Elena Kagan in part, dissented. In her view, Congress’ post-TAMA amendments to Section 47(b) ratified TAMA’s holding, rather than changed it. (Dissent 7-10). She pointed to House and Senate Committee Reports for the post-TAMA amendments that explicitly stated private rights of action should be implied under the amended statute “to the same extent” as before. (Dissent 12).

Justice Kagan wrote separately, explaining that she believed that Section 47(b)’s text is sufficiently clear such that there is no need to rely on legislative history to interpret the statute.

Impact on Investors

• Even more state court actions? The decision is a setback for activist investors like Saba that are now foreclosed from suing for contract rescission under the ICA. Prior to this decision, activist investors had some success bringing ICA rescission cases before the Second Circuit. The decision may shift litigation to state court, as activists may now look even more to state law claims like breach of fiduciary duty claims or proxy fights to challenge governance structures.
• Funds are better insulated. Relatedly, while the decision did not address the legality of the Funds’ actions, it nevertheless gives funds one less federal challenge to worry about when opting into state control share statutes to resist activist pressure. Without the threat of an ICA lawsuit, some closed-end funds may feel more confident using state incorporation law as a shield against activist investors like Saba. More broadly speaking, there is one less mechanism available to shareholders to hold closed-end funds, especially underperforming ones, accountable.
• Less enforcement of the ICA? In her dissent, Justice Jackson cited House and Senate Committee Reports that stated private actions could fill the enforcement gap created by the SEC’s relatively small staff. (Dissent 12). The Court’s ruling limits shareholders’ avenues for challenging alleged violations of the ICA and places the onus back on the SEC, which has recently brought significantly fewer enforcement actions generally.

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© Arnold & Porter Kaye Scholer LLP 2026 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.