Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Exploring the Significant Ramifications of the Supreme Court’s FS Credit Ruling

Skadden Publication

Shay Dvoretzky Parker Rider-Longmaid Eben P. Colby Kevin T. Hardy Scott D. Musoff Marley Ann Brumme Steven Marcus

Executive Summary

  • What’s new: The U.S. Supreme Court’s ruling in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd. that Section 47(b) of the ICA does not create a private right of action has significant ramifications for the fund industry. 
  • Why it matters: The decision takes a major arrow out of the quiver of activist investors who have wielded litigation under Section 47(b) to extract short-term profits from closed-end funds at the expense of long-term investors, while consolidating ICA enforcement in the SEC.
  • What to do next: Funds should monitor whether private plaintiffs seek to bring state-law claims seeking rescission for alleged ICA violations, and how the SEC decides to enforce alleged violations of the ICA going forward.

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In a significant win for the registered fund industry, the U.S. Supreme Court held in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., No. 24-345, that Section 47(b) of the Investment Company Act of 1940 (ICA) does not create a private right of action. Tracking briefing led by Skadden, plus oral argument by Skadden’s head of Supreme Court and appellate litigation, Shay Dvoretzky, the Court held that the text and structure of Section 47(b) foreclose private suits to rescind contracts alleged to violate the ICA. Rather, the Court held, the Securities and Exchange Commission (SEC) has near-exclusive authority to enforce the ICA. As Skadden explained in a client alert on the day of the ruling, the decision neutralizes a tool used by activist investors and others to rescind fund contracts.

Beyond that, the Court’s decision has significant additional ramifications for the fund industry. It also reaffirms the Court’s textualist approach to statutory interpretation and forcefully rejects reliance on legislative history.

First, for the fund industry, the decision brings a strong measure of stability but some uncertainty remains.

  • The decision takes a major arrow out of the quiver of activist-investor plaintiffs, who have wielded litigation and the threat of litigation under Section 47(b) to further their agenda of extracting short-term profits from funds at the expense of long-term investors. Section 47(b) suits threatened a host of contracts and fund bylaws (considered contracts under relevant state law)that allegedly violated the ICA. This case closes the door on those suits.
  • The decision affirms the central role of the SEC in enforcing the ICA. The ICA provides only two narrow private rights of action; Section 47(b) doesn’t create a right to sue. The decision thus confirms that the SEC is the ICA’s primary enforcer.
  • The decision leaves several questions unanswered, but its reasoning may provide some clues.
    • First, may private plaintiffs bring state-law claims seeking rescission for alleged violations of the ICA? The Court’s reasoning that Congress meant to vest the SEC with near-exclusive enforcement authority suggests that state law has no role to play, but the Court did not decide whether the ICA preempts state-law suits seeking rescission. Funds might also have separate state-law defenses to state-law claims seeking rescission — including the argument that, as a matter of state law, state law does not provide a private right of action based on a violation of a federal law (the ICA) that doesn’t allow for private enforcement.
    • Second, how will the SEC decide to enforce (or not) alleged violations of the ICA, and when will the SEC seek rescission based on ICA violations? And what judicial deference would the SEC get (or not) for its interpretation of the ICA? The Supreme Court has sharply limited deference to agency interpretations in recent years, but courts in practice may give the SEC deference in a complicated area of law.
    • Third, do the voting provisions underlying this case (or similar voting provisions) violate the ICA? The Court didn’t decide, and there has been little percolation in the lower courts on the question. Future litigation (if there is a valid and non-preempted state-law cause of action) or SEC actions may answer that question.

Second, and more generally, the decision is a powerful reaffirmation of textualism.

  • The Court reaffirmed an important lesson from Sandoval, focusing only on statutory text and structure to determine whether Congress created a private right of action — even when interpreting a statute like the ICA that was enacted during a very different jurisprudential era.
  • The majority forcefully rejected Justice Ketanji Brown Jackson’s defense of legislative history as an interpretative tool. Although dissenting from the majority’s opinion, Justice Elena Kagan did not join Justice Jackson’s opinion as to its discussion on legislative history, and she wrote separately to disavow Justice Jackson’s view.

Background

In 2023, Saba Capital Master Fund and Saba Capital Management sued several closed-end funds incorporated in Maryland. The funds had opted into the Maryland Control Share Acquisition Act (MCSAA), which regulates the voting rights of certain fund shareholders. Closed-end funds are often attractive to long-term investors (like investors saving for retirement) because the funds’ capital stays in the fund, giving funds a greater ability to generate consistent distributions over time. In contrast, activist investors like Saba seek to gain footholds in closed-end funds to change their investment priorities to favor short-term profits at the expense of long-term investors.

Saba sought to control the closed-end funds here by buying up a significant percentage of shares. Potentially barred from voting shares above a certain amount by the MCSAA, Saba sued in the Southern District of New York, alleging that the funds’ adoption of bylaws provisions to opt in to the MCSAA violated Section 18 of the ICA. Saba sought rescission of those provisions of the funds’ bylaws. Saba invoked Section 47(b) of the ICA, which provides that “a court may not deny rescission” of contracts violating the ICA “at the instance of any party” unless the court makes certain findings.

The district court ruled in Saba’s favor, applying Second Circuit precedent holding that Section 47(b) creates an implied private right of action for private parties like Saba to seek rescission. The district court agreed with Saba that the challenged bylaws provisions violated the ICA. The Second Circuit affirmed.

In briefing led by Skadden, the funds petitioned the Supreme Court for certiorari. The funds observed that only the Second Circuit read an implied private right of action into Section 47(b), while other courts, like the Third and Ninth Circuits, squarely rejected an implied private right of action. The Supreme Court called for the views of the U.S. Solicitor General, which sided with the funds and urged the Court to hear the case and reverse. The Court took up the invitation.

The Court’s Opinions

The Supreme Court agreed with Skadden and reversed, holding that Section 47(b) does not create a private right of action to seek rescission. Justice Amy Coney Barrett authored the majority opinion; Justices Sonia Sotomayor, Kagan and Jackson dissented.

The Majority Opinion

Justice Barrett’s opinion begins by reaffirming the demanding standard the Court applies when deciding whether Congress implied a private right of action. That high standard flows from the basic principle that “Congress determines who may sue to enforce federal law.” Decades ago, the Court viewed its interpretive role as furthering Congress’ purpose by implying private remedies in statutes, even when Congress hadn’t expressly included those remedies. But the Court has since emphatically rejected that role, most robustly in Alexander v. Sandoval, 532 U.S. 275 (2001), which ushered in an era of skepticism toward implied private causes of action. In this new era, the Court examines only “the statute’s text and structure” to decide whether Congress intended private statutory enforcement.

Applying that standard, the majority concluded that “nothing in the text or structure of the ICA indicates that Congress authorized private parties to enforce virtually every provision of the statute.”

As to text, the majority reasoned that the key statutory language — that a court “may not deny rescission at the instance of any party” — didn’t create individual rights. That’s because the language speaks to courts, not parties. Indeed, the statutory language presupposes that parties are already before the court on some other basis. What’s more, the majority reasoned, rescission is “a remedy, not a cause of action.” Typically, other sources of law (like a common law breach of contract action) provide the cause of action permitting rescission.

Turning to context, the Court reasoned that Congress gave the SEC a suite of tools to enforce the ICA, including investigations and power to bring actions for injunctive relief or civil monetary penalties. That authority amounts to a “comprehensive agency enforcement scheme” suggesting that private enforcement is generally unavailable. To be sure, Congress expressly authorized two private rights of action in the ICA. But, tellingly, it did not do so in Section 47(b).

The majority rejected Saba’s counterarguments. Saba primarily relied on the Supreme Court’s 1979 decision in Transamerica Mortgage Advisors v. Lewis (TAMA), 444 U.S. 11 (1979), which held that a different provision of a different statute (Section 215 of the Investment Advisors Act (IAA)) created a private right of action. But while those provisions were analogous in 1979, when TAMA was decided, Congress amended the ICA in 1980, removing the very language Saba contended create a private right of action.

The majority also countered the dissent’s contention that legislative history showed Congress’ intent to create a private right of action. The Court reaffirmed that “Congress expresses itself as a body through the text it enacts,” not what some members of Congress might write in committee reports. The Court also took on the dissent’s reliance on legislative history on its own terms, calling it “the equivalent of entering a crowded cocktail party and looking over the heads of the guests for one’s friends” while ignoring many other guests. In the Court’s view, the dissent relied on generic statements from legislative history expressing a preference for implying private rights of action, but failed to find anything suggesting that Congress intended a private right of action under Section 47(b).

Separate Writings

Justice Kagan and Justice Jackson both penned dissents. In a one-paragraph dissent, Justice Kagan noted that she thought Section 47(b) unambiguously confers a private right of action. She thus joined Justice Jackson’s dissent to that extent, while abstaining from the portions of Justice Jackson’s dissent embracing legislative history.

Justice Jackson, joined by Justice Sotomayor in full and Justice Kagan in part, wrote the principal dissent.

Justice Jackson began with TAMA. In her view, Congress codified TAMA’s holding that Section 215 of the IAA creates a private right of action by amending Section 47(b) of the ICA. By adding the terms “at the instance of any party” and “rescission” in the wake of TAMA, she reasoned, Congress sought to ensure that TAMA’s holding would extend to Section 47(b) of the ICA.

In a lengthy section of the dissent joined by Justice Sotomayor but not Justice Kagan, Justice Jackson relied on legislative history she viewed as confirming her textual analysis. Justice Jackson homed in on a sentence in a House committee report: “The Committee wishes to make plain that it expects the courts to imply private rights of action under this legislation.” Defending the use of legislative history as a tool of statutory interpretation, Justice Jackson argued that ignoring legislative history risks replacing the will of legislators with the Court’s own views about policy.

Implications

The Court’s decision is an important monument to textualism that will likely have significant ramifications for the fund industry.

For the fund industry, the decision is a big win. It takes off the table a powerful weapon activist investors had used to try to gain control of closed-end funds or push them towards short term liquidity events. The result instead is consolidation of ICA enforcement in the SEC.

At the same time, the decision leaves some issues for future resolution, including whether parties can seek rescission of contracts that allegedly violate the ICA by using state-law causes of action, and how the SEC will enforce alleged ICA violations and what kind of deference courts will afford the agency’s interpretations.

As to statutory interpretation more generally, the decision arguably heightens the bar for implied private rights of action. It also crystallizes a forceful rejection by a majority of the Supreme Court of legislative history as a way of divining congressional intent.

For the Fund Industry

The decision has major implications for the fund industry, while raising questions that may arise in future litigation.

First, the decision is a major win for the industry, because it takes an arrow out of the quiver of activist investors who might use litigation (or the threat of litigation) to pursue their short-term arbitrage strategy at the expense of long-term shareholders.

Before the Court’s decision, private parties had relied on Section 47(b) of the ICA to seek rescission of a host of different contracts on the grounds that they violate the ICA. For instance, a pension fund brought suit under Section 47(b) seeking both to undo Yahoo!’s investment in Alibaba and to rescind employment contracts of Yahoo! executives on the ground that Yahoo! was in violation of the ICA. See UFCW Local 1500 Pension Fund v. Mayer, 895 F.3d 695 (9th Cir. 2018). In another case, shareholders relied on Section 47(b) to try to invalidate investment advisory agreements on the grounds that the advisor failed to participate in certain securities class actions. Hamilton v. Allen, 396 F. Supp. 2d 545 (E.D. Pa. 2005). Other investors sought to rescind shareholder rights plans by using Section 47(b) as a cause of action. Saba Capital Master Fund v. ASA Gold & Precious Metals Ltd., No. 24-cv-690 (S.D.N.Y.). And there are doubtless more examples where private parties threatened litigation to the significant expense of funds. As the Court explained, the right to rescission Saba sought in Section 47(b) was a “sweeping right” to “void any type of contract that violates the ICA.”

In taking private enforcement out of the hands of private plaintiffs, the Court’s decision reaffirms the centrality of the SEC to enforcing the ICA. Indeed, the SEC’s enforcement authority was a central pillar of the majority’s analysis. The Court described the SEC’s regulatory power as a “comprehensive agency enforcement scheme,” recognizing the SEC’s power to investigate and to bring actions for a range of penalties. The SEC is the ICA’s “main enforcer,” and by consolidating enforcement authority in the hands of the ICA, the Court ensures that regulated parties need only worry about private enforcement of the two ICA provisions that expressly create private rights of action, at least so far as a federal right of action is concerned — more on that below.

Second, while the decision closes the door on the availability of Section 47(b) as a private right of action for rescission, it leaves at least two related questions unanswered. The Court didn’t decide whether causes of action seeking rescission of contracts that allegedly violate the ICA are permissible under state law, or address whether the provisions adopted by the funds in the case actually violate the ICA. Future litigation on both questions is almost certain.

In deciding that Section 47(b) doesn’t create a private right of action for rescission, the Court left open whether parties may invoke state law to seek rescission of contracts that allegedly violate the ICA. But the Court’s opinion contains hints that there may be strong defenses to using state law to try to privately enforce ICA violations.

For starters, funds may have defenses based on state law. The Court’s decision makes clear that rescission is merely a remedy that requires some cause of action as a vehicle. Funds would be able to explore arguments that state law does not provide a cause of action where the underlying violation is not independently actionable. Put differently, state law might not provide a private right of action based on a violation of a federal law (the ICA) that the Court has now held creates no implied private right of action.

Beyond that, the Court’s reasoning could support a federal preemption argument. The Court reasoned that Congress intentionally made the SEC the ICA’s primary enforcer in a carefully calibrated scheme. As Skadden argued in its briefing, allowing parties to pursue rescission through state law, when Congress denied that route under Section 47(b), would accomplish through the back door what Congress rejected at the front. It makes little sense to think that in empowering an expert federal agency to enforce federal law, Congress also meant to allow 50 different states to set their preferred policies.

Third, on the merits of the underlying question, the Court didn’t decide whether opting into the Maryland Control Share Acquisition Act (or similar laws, or adopting similar voting provisions) violated the ICA. That question remains unresolved in the courts as well. The Second Circuit’s underlying decision is nonprecedential. And while its earlier decision in Saba Capital CEF Opportunities 1 v. Nuveen Floating Rate Income Fund, 88 F.4th 103 (2d Cir. 2024), held that certain voluntary control-share provisions limiting voting rights adopted in fund bylaws in the absence of a state control share statute violated the ICA, the Second Circuit has not determined in a precedential opinion whether provisions adopted to opt in to a state control share statute comply with the ICA.

In any event, since Section 47(b) doesn’t provide a cause of action, and the Court stressed the SEC’s enforcement role, the question is whether courts will have an occasion to address allegations of underlying ICA violations. That question likely will turn in large part on whether parties can get into court on some state-law cause of action in the first place, as discussed above. It is also likely to turn on the SEC’s own decisions, since the SEC, as the Court observed, has authority to bring judicial enforcement actions, in addition to its administrative power.

Finally, the decisions the SEC makes going forward could raise questions about the deference the agency is due for its statutory interpretations. The SEC’s current view is that control-share opt-ins like the ones adopted by the funds here do not violate the ICA so long as they are “taken with reasonable care on a basis consistent with other applicable duties and laws and the duty to the fund and its shareholders generally.” That view represents a shift from years before. If a court ultimately confronts the question, it will need to decide whether to approach the question without deference to the agency’s views or whether the agency, specially charged with ICA enforcement authority, deserves a measure of respect for its judgment. And whatever the doctrinal answer, courts in practical reality may give the agency deference in what they may view as a complicated area of corporate governance.

For Statutory Interpretation

Beyond the fund industry, the Court’s decision is a powerful reaffirmation of textualism and the Court’s commitment to determining Congress’ intent from enacted text rather than purpose or legislative history.

Implied Private Rights of Action

The majority opinion picks up where Sandoval (2001) left off. Sandoval marked a break from the bad old days of implied private rights of action (characterized by the Court’s decision in J.I. Case Co. v. Borak, 377 U.S. 426 (1964), which interpreted the Securities Exchange Act of 1934) and ushered in a new era focusing on statutory text and structure to discern Congress’ intent in creating a private right of action. In the decades since Sandoval, which interpreted Title VI of the Civil Rights Act, the Supreme Court has applied that methodology to regularly reject arguments that various statutes imply private rights of action. See, e.g., Astra USA, Inc. v. Santa Clara, 563 U.S. 110 (2011) (Section 340B of the Public Health Services Act).

The Court reaffirmed an important lesson from Sandoval: Even if one could argue that, at the time Congress enacted a statute, courts took a more purposivist approach of inferring private rights of action, courts must apply ordinary textualist principles today. Thus, even though Congress enacted the Investment Company Act in 1940 during a different jurisprudential era — when, arguably, members of Congress may have assumed that a reviewing court would more readily find private rights of action despite a lack of explicit language — the test today focuses on statutory text and structure alone. The question now is whether, based on the words it enacted, Congress manifested an objected intent to confer enforceable rights on private parties. And, the Court found, the answer here for Section 47(b) is no.

Legislative History

The Court’s decision is a powerful rejection of legislative history — not just by Justice Barrett and the other five justices in the majority, but also by Justice Kagan, who refused to join Justice Jackson’s long defense of legislative history.

Justice Jackson made several arguments advocating for turning to legislative history as an interpretive tool. She discusses empirical scholarship concluding that lawmakers may pay more attention to committee reports than they do to statutory text itself. And, she argues, the Court incongruously adopts a “practical understanding of legislative intent” when applying the major questions doctrine, West Virginia v. EPA, 597 U.S. 697, 723 (2022), but ignores legislative history.

The majority doesn’t take on those methodological defenses at a granular level. Instead, the Court explains that Congress (and the signing president) act through enacted text, not the views of individual legislators. As Justice Barrett put it, Congress could have made express what it instead put in the committee reports — and its failure to do so only leads to questions about what “a majority of the House, a majority of the Senate, and the President” thought (or didn’t). “Congress expresses itself as a body through the text it enacts; the views of the 42-member House Committee on Interstate and Foreign Commerce and of the 15-member Senate Committee on Banking, Housing, and Urban Affairs are not the law.”

That view has much to commend it in a nation of laws. Parties must be able to rely on the public text Congress enacts, not on wide-ranging hunts through legislative history. That’s likely also why Justice Kagan, while dissenting, refused to join Justice Jackson’s discussion of legislative history. Her view is that “legislative history, for those who care about it, puts extra icing on a cake already frosted.” Yates v. United States, 574 U.S. 528, 557 (2015). And she must have felt strongly to publicly part ways with Justice Jackson’s dissent — her separate writing represents only the second time she has issued a solo dissent. In the end, the debate between Justice Jackson and the majority would seem to make clear that the Court will be dismissive of legislative history arguments going forward.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.

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