Court Curbs Private Suits Under Fund Law

The U.S. Supreme Court ruled 6-3 on Thursday that private investors cannot sue to undo contracts under the Investment Company Act, narrowing a tool activist shareholders had used against investment funds.

The decision said federal law does not let private parties void contracts that allegedly violate the 1940 statute "absent some other legal dispute," Law360 reported. The ruling reverses lower courts that had allowed such suits and sends future enforcement of the provision back toward the Securities and Exchange Commission.

The case

The dispute, FS Credit Opportunities Corp. v. Saba Capital Master Fund, turned on whether Section 47(b) of the Investment Company Act lets private plaintiffs seek "rescission" of contracts alleged to violate the law — a question that had divided lower courts, Newsweek reported. The majority held that the statute does not create an implied private right of action, stressing that Congress typically spells out when private parties may sue and had not done so here.

The case arose after Saba Capital, an activist hedge fund led by Boaz Weinstein, challenged measures adopted by closed-end funds — including funds linked to BlackRock and other asset managers — that limited the voting power of large shareholders, according to Newsweek and GuruFocus. Saba argued the provisions violated the act's equal-voting-rights requirement and asked courts to rescind them. Lower courts agreed; the Supreme Court did not.

A sharp split

Justice Amy Coney Barrett wrote for the majority and criticized the court's liberal wing, saying its dissent rested on a "fictional premise," Newsweek reported. Justices Sonia Sotomayor, Elena Kagan and Ketanji Brown Jackson dissented.

The ruling reinforces the role of Congress and the SEC, rather than the courts, in deciding how the securities law is enforced. By closing off private rescission suits, the decision could push future fights over fund governance back to regulators and narrow one avenue investors have used to challenge fund practices.

The outcome is the latest Supreme Court decision shaping the reach of federal securities law. Last week, the justices upheld the SEC's power to recoup illegal gains without proving investor losses. Private securities disputes also continue to move through lower courts, including a case brought by investors who say they were misled.

Saba vows to press on

Weinstein said the ruling did not validate the conduct of closed-end fund managers, noting the court "did not rule" that they followed the law and found only that shareholders cannot sue under one provision of the act, according to Newsweek. He said future challenges would simply come "in other forms" and that Saba would pursue "every avenue available."

For closed-end funds, which issue a fixed number of shares that often trade below the value of their holdings, the decision offers protection from a recurring line of activist attack. Such funds have increasingly been targeted by investors seeking to force changes in governance or unlock the gap between share prices and asset values.

Frequently Asked Questions

What did the Supreme Court decide?

By a 6-3 vote, the court held that private investors cannot sue under Section 47(b) of the Investment Company Act to rescind contracts that allegedly violate the law. It found the statute does not create an implied private right of action.

What is the Investment Company Act?

The Investment Company Act of 1940 is the federal law that regulates mutual funds, closed-end funds and other investment companies. It sets rules on fund governance, including shareholder voting rights.

Who is Saba Capital?

Saba Capital is an activist hedge fund founded by Boaz Weinstein. It has pressed closed-end funds, including funds tied to BlackRock, to change governance provisions it says limit the voting power of large shareholders.

What does the ruling mean for investors?

It closes one path private investors used to challenge fund practices in court, shifting enforcement toward the SEC. Activists can still pursue other legal and shareholder strategies, but not rescission suits under this provision.

Sources

Reporting compiled from court records and the cited source outlets.