SCOTUS Delivers Win for Investment Funds, Rejects Activist Lawsuits Under Securities Law

The U.S. Supreme Court delivered a major victory for the investment industry this week, ruling against activist hedge funds seeking to use federal courts as a weapon against closed-end funds and their boards.

In a 6-3 decision, the high court ruled that Section 47(b) of the Investment Company Act of 1940 does not create an implied private right of action allowing shareholders to sue for rescission of contracts that allegedly violate the Act.

The ruling in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd. reverses a Second Circuit decision that had opened the door for private lawsuits against closed-end funds, particularly those targeted by aggressive activist investors such as Saba Capital.

Justice Amy Coney Barrett wrote the majority opinion, joined by Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito, Neil Gorsuch, and Brett Kavanaugh.

Her opinion delivered a direct rebuke to judicial overreach and reaffirmed a basic constitutional principle: courts do not get to invent lawsuits that Congress did not authorize.

“Congress, not the Judiciary, decides who may enforce the law,” Barrett wrote.

“The Investment Company Act designates the Securities and Exchange Commission as its primary enforcer and expressly permits shareholders and issuers of securities to enforce two of its provisions,” she wrote.

“We must decide whether another provision of the Act impliedly empowers private parties to sue for rescission of any contract that allegedly violates the Act. The answer is no,” Barrett added.

The case arose from Saba Capital’s activist campaign against several closed-end funds, including funds managed by FS Credit Opportunities and affiliates of BlackRock.

Saba challenged board-adopted resolutions opting into Maryland’s Control Share Acquisition Act, a law designed to limit the voting power of large shareholders and help protect funds from hostile takeover tactics.

The hedge fund argued that those provisions violated the Investment Company Act’s equal voting rights requirement under Section 18(i), then sought rescission under Section 47(b).

Lower courts, relying on Second Circuit precedent, sided with Saba. The Supreme Court has now rejected that approach.

Barrett’s opinion focused on the text and structure of the statute. Section 47(b) states that a court “may not deny rescission at the instance of any party” for performed contracts violating the ICA unless equity and the purposes of the Act require otherwise.

The majority concluded that this language instructs courts on remedies when a proper case is already before them. It does not create a new right for private parties to sue.

“Section 47(b)’s wording thus presupposes that parties are already before the court and directs the court’s use of its remedial authority. It says not a word about individual rights,” Barrett explained.

The decision reinforces the Securities and Exchange Commission’s primary enforcement role under the Investment Company Act. It also aligns with the conservative majority’s broader skepticism toward implied private rights of action, especially when Congress did not clearly create them.

“Private litigants sometimes sue to enforce statutes that lack comparable language,” Barrett noted, rejecting the activist-era practice of implying lawsuits into federal statutes to advance policy goals.

The ruling carries major consequences for the roughly $2 trillion closed-end fund industry, as well as mutual funds, business development companies, and asset managers.

By shutting down private rescission suits under Section 47(b), the Supreme Court has limited the ability of activist investors to pressure funds through litigation, force conversions, overhaul boards, or push liquidations — tactics critics argue often prioritize short-term gains over long-term stability for retail investors.

Industry groups praised the decision.

The Investment Company Institute welcomed the ruling, saying it preserves the Investment Company Act’s “comprehensive, carefully calibrated framework” and prevents an “open season” of backdoor private litigation.

Skadden Arps, which represented the funds, called the decision a “major win for the registered fund industry” that removes a key activist tool.

Supporters of the ruling say it protects fund governance, reduces abusive lawsuits, and leaves enforcement in the hands of the SEC, the agency Congress designated to police the statute.

The decision also resolves a circuit split by bringing the Second Circuit in line with the Third and Ninth Circuits, both of which had rejected similar implied private rights of action.

For Main Street investors, the ruling could mean greater stability in funds designed to provide income, diversification, and long-term value rather than becoming targets for activist disruption.

Legal analysts described the decision as another example of the Roberts Court’s textualist approach: applying the law as written, limiting judicial invention, and leaving policy decisions to Congress and federal agencies.

The ruling fits a broader pattern of curbing expansive private enforcement in securities and regulatory law while giving businesses greater predictability against plaintiff-driven litigation.

For conservatives, the decision is a strong win for the rule of law, free markets, and separation of powers. The Court made clear that activist investors cannot ask judges to rewrite federal statutes simply because doing so would advance their financial strategy.

Congress writes the law. The SEC enforces the Act. And activist hedge funds do not get to manufacture private lawsuits out of statutory silence.