In its October 2025 Term, the Supreme Court will decide whether Section 47(b) of the Investment Company Act of 1940 (“ICA”) creates a federal cause of action for private plaintiffs seeking rescission of contracts that are alleged to violate the ICA. The Second Circuit stands alone in recognizing such a cause of action, creating a split with the Ninth, Fourth, and Third Circuits, which have declined to recognize one. In FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., the Court will resolve the circuit split.
The case centers around attempts by an activist investor to gain control over four funds organized under Maryland law and covered by the ICA. When the investor began acquiring substantial stakes in the four funds, each one adopted a resolution to opt into a provision of Maryland law designed to make it more difficult for outside investors to concentrate voting power. Under the Maryland law, when a person acquires shares entitling it to control at least ten percent of shareholder voting power, the person lacks voting rights “with respect to the control shares,” unless approved by a two-thirds vote of other shareholders. Md. Code Ann., Corps. & Ass’ns § 3‑702(a)(1).
The investor filed a lawsuit in the United States District Court for the Southern District of New York against the four funds. Its complaint alleged that the funds’ bylaws opting into the Maryland law violated Section 18(i) of the ICA, which provides that “every share of stock hereafter issued by a registered management company . . . shall be a voting stock and have equal voting rights with every other outstanding voting stock.” 15 U.S.C. § 80a‑18(i). The investor further alleged that Section 47(b) provides a private right of action for it to seek rescission of the provisions of the bylaws through which the funds had opted into the Maryland law.
The district court granted the investor summary judgment, concluding that the bylaws of a corporation were contracts between the corporation and its shareholders and finding that the investor, as a party to the contract, was entitled to rescission of the bylaws at issue.
In an unpublished summary order, the Second Circuit affirmed, finding that the challenged resolutions violate Section 18(i) and that the district court did not abuse its discretion in granting rescission under Section 47(b). The court did not analyze whether Section 47(b) gives rise to a private right of action, as the Second Circuit had previously held that it does in Oxford University Bank, v. Lansuppe Feeder, LLC, 933 F.3d 99 (2d Cir. 2019).
In Oxford University Bank, the Circuit held that the plain language of Section 47(b) “creates an implied private right of action for a party to a contract that violates the ICA to seek rescission of that violative contract.” 933 F.3d at 109. Section 47(b) provides:
(1) A contract that is made, or whose performance involves, a violation of this subchapter . . . is unenforceable by either party.
(2) To the extent that a contract described in paragraph (1) has been performed, a court may not deny rescission at the instance of any party unless such court finds that under the circumstances the denial of rescission would produce a more equitable result than its grant and would not be inconsistent with the purposes of this subchapter.
15 U.S.C. § 80a–46(b) (emphasis added).
This statutory text, the court explained, “presupposes that a party may seek rescission in court by filing suit.” Oxford Univ. Bank, 933 F.3d at 105. From that premise, the court had no trouble concluding that the statutory language was “effectively equivalent to providing an express cause of action.” Id.
But other courts of appeals interpreting this language reach the opposite result, finding that the statute lacks the explicit rights-creating language necessary to authorize private suits. These courts distinguish between the statutory language rendering contracts that violate the ICA unenforceable, say in a breach of contract suit, and the language that would be necessary to create a distinct federal cause of action. Under these decisions, the SEC has exclusive authority to enforce the ICA.
The Supreme Court’s upcoming decision will have important implications for businesses and regulators. While it was long accepted that the ICA did not create a federal cause of action for private plaintiffs, the Second Circuit’s 2019 decision destabilized that settled understanding. Oxford University Bank undermined the SEC’s ability to create a uniform ICA enforcement regime in favor of providing private plaintiffs a license to seek rescission of a broad spectrum of contracts—including advisory agreements, securities issuances, and corporate bylaws. If the Supreme Court agrees with the Second Circuit’s interpretation of Section 47(b), investor funds may face additional litigation and disruption to their operations: contracts central to the basic operations of a registered fund will be potentially subject to rescission under the ICA.
