Supreme Court Hears Case on Private Right of Action in Investment Company Act

Action: On December 10, the Supreme Court heard arguments in a case dealing with whether the Investment Company Act (ICA) includes an implied “private right of action” allowing shareholders to challenge fund governance structures that may conflict with Federal law.^[1]  

Trusted Insights for What's Ahead^®

• The case, FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., deals with a provision of FS Credit’s fund control-share bylaws restricting the voting rights of shareholders who own 10% or more of a fund’s shares, which Saba argues violates Section 18(i) of the ICA. Section 18(i) requires all shares of a registered investment company to have equal voting rights.
• Because the ICA does not expressly authorize private suits under Section 18(i), Saba has argued that Section 47(b), which states that contracts made in violation of the ICA are unenforceable, creates an implied private right of action.
• The US District Court for the Southern District of New York ruled for Saba, a decision upheld by the US Court of Appeals for the Second Circuit. However, other courts have rejected similar claims, leaving lower courts divided on whether the ICA permits implied rights of action. At the same time, the Supreme Court has also in recent decades been increasingly reluctant to recognize implied rights of action absent clear statutory authorization.
• However, in oral argument, several Justices appeared open to the narrow form of relief Saba seeks, potentially including the Chief Justice and Justices Brett Kavanaugh and Elena Kagan. Justice Neil Gorsuch, however, was more skeptical as the statute is not explicit on private rights of action.^[2]
• What this means for business: The case has significant implications for investment companies and indirectly, for the securities of companies in which they invest. If the Court upholds an implied right of action in the ICA, funds may face increased litigation over voting rules, board structures, and anti-activist investor provisions. Fund sponsors will likely reassess governance practices to mitigate litigation risk and ensure alignment with federal regulation. Conversely, if the Court rejects this right, enforcement will be left entirely to the SEC, which, given limited agency resources, likely reduces litigation risk for funds and makes activist investor challenges more difficult.