FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd.

    Issues

    Does Section 47(b) of the Investment Company Act create a federal right of action for private entities?

    Oral argument:
    December 10, 2025
    Court below:
    United States Court of Appeals for the Second Circuit

    This case asks the Court to determine whether Congress created an implied private right of action under the Investment Company Act (“ICA”) of 1940, by stating in Section 47(b) that a court “may not deny rescission at the instance of any party.” Petitioners argue that Congress did not intend to grant private parties the right to sue, as Congress would have explicitly stated a private right in the ICA had they intended to include one. Additionally, Petitioners argue that the words of the statute themselves do not imply a private right of action. Respondents contend that Congress’s use of “rights-creating language” in the statute demonstrated its intent to create a private right of action and assert that the plain text of the statute does in fact explicitly state this right. This case touches on important questions regarding the separation of powers between federal branches of government and the impact of ICA enforcement on the market.

    Questions as Framed for the Court by the Parties

    Whether Section 47(b) of the Investment Company Act creates an implied private right of action.

    Facts

    In 1940, Congress enacted the Investment Company Act (“ICA”), along with a number of other pieces of legislation, in response to the stock market crash of 1929 and subsequent Great Depression, in order to regulate securities and prevent a similar economic crisis.  The ICA regulates mutual funds, which invest and trade in securities and whose shares are open to the investing members of the public.  The ICA intends to minimize conflicts of interest by regulating mutual funds’ structure and operations, and by requiring disclosure of information to the public.

    Petitioners are FS Credit Opportunities Corp. (“FSCO”) and eleven other “closed-end” mutual funds (“Funds”), all of which adopted the “Control-Share Provision” of the Maryland Control Share Acquisition Act.  This provision restricted the voting rights of shareholders, denying voting rights of shares that would place the holder at or above 10% of a fund’s voting power. FSCO argued that this provision was necessary in order to protect long-term investors from investors who sought to take over a fund and maximize profits in the short-term. Saba Capital Management LP (“Saba”) filed suit in the United States District Court for the Southern District of New York and moved for summary judgement, alleging that this provision violated 18(i) of the ICA, which requires every share of stock to have equal voting rights. Saba’s motion for summary judgement was granted by the district court which ruled that if owners of a stock cannot vote with it, the stock ceases to become “voting” stock and deprives certain shareholders of their voting rights, in violation of 18(i). The United States Court of Appeals for the Second Circuit affirmed the district court’s judgment.

    However, the parties dispute whether Saba could bring a claim against FSCO in court for a violation of the ICA, or whether 18(i) must be enforced by the Securities and Exchange Commission (“SEC”). Section 47(b)(2) of the ICA states that a court cannot deny rescission “at the instance of any party,” which can be interpreted to grant an implied private right of action for parties to a contract that violates the ICA. Due to a split between the Third and Ninth Circuits, which hold that Section 47(b) of the ICA does not create a private right of action, and the Second Circuit, which does read an implied private right of action into Section 47(b), FSCO argued that the outcome of Saba’s lawsuit was determined by the location in which it was filed. FSCO asserted that courts in the Third, Ninth, and likely Fourth Circuits would have dismissed Saba’s lawsuit outright, while the Second Circuit required summary judgement.

    Accordingly, on September 24, 2024, FSCO petitioned the Supreme Court of the United States to hear this case. Respondents BlackRock ESG Capital Allocation Trust and BlackRock Municipal Credit Alpha Fund, Inc. (collectively “Blackrock Respondents”) were defendants in the lower proceedings and joined Petitioners on writ of certiorari. The Supreme Court granted certiorari on June 30, 2025. 

    Analysis

    CONGRESSIONAL INTENT

    FS Credit Opportunities Corp. et al. and Blackrock Respondents (collectively “FSCO”)argue that courts reading a private right of action into the ICA violates Article I § 1 of the Constitution, which assigns legislative powers only to Congress. FSCO cites prior court decisions ruling that where Congress does not provide a right of action through a statute, courts cannot create one. FSCO argues that, therefore, courts must look to congressional intent when reading an implied private right of action into a statute. FSCO contends that neither the text nor the structure of the ICA suggests that Congress intended a private right of action. FSCO argues that there is no language in the statute itself that is “rights-creating” in reference to a specified class of persons, something that would demonstrate congressional intent. FSCO further contends that the structure of the ICA does not support a private right of action. To support this argument, FSCO cites Northwest Airlines, Inc. v. Transport Workers Union of America, which holds that if a statute contains an express, carefully defined provision for private enforcement in one section but does not do so elsewhere, this serves as strong evidence for a lack of intent to authorize additional remedies. FSCO argues that Congress’s inclusion of express private rights of action in Sections 30(h) and 36(b) show that Congress would have included an express private right of action in Section 47(b) had it intended one. Furthermore, FSCO argues that the legislative history of the ICA shows that Congress intended the SEC to enforce the provisions within, as the bill was part of a cooperative effort by the SEC and fund industry representatives and would not have received the same support from industry representatives had it authorized a private right of action.

    Saba Capital Master Fund, Ltd. et al. (“Saba”) argues that FSCO conflates recognizing a limited private right of action with inferring a broader private damages remedy and contends that the two are fundamentally different. Saba suggests that if courts inferred a private right to an action for damages, this would broach the separation of powers by requiring courts to address questions beyond guidance given by Congress. However, Saba argues that if a court were to recognize a specific and limited right to rescission, the corners of this remedy have already been defined by statutory language, leaving little policy interpretation to courts. Saba disputes FSCO’s assertion that 47(b) does not contain “rights-creating” language, arguing that by allowing “rescission at the instance of any party,” Congress demonstrates intent to create a right by focusing on a specific class of individuals who will be protected: plaintiffs burdened by contracts that violate the ICA. Additionally, Saba asserts that each subsection of § 47 contains provisions to ensure that investors are not trapped in ICA-violating contracts and argues that this structure confirms Congress’s intent to allow investors a private right of action. Saba further contends that Congress never intended the SEC to be the only entity with the power to remedy ICA violations, and in fact has encouraged private enforcement of the ICA in the past. Saba argues that FSCO provides no evidence that the fund industry would have opposed a private right to rescission, especially considering the limited nature of this protection and the fact that fund representatives accepted harsher provisions in the ICA.

    STATUTORY TEXT

    FSCO argues that regardless of Congressional intent, Section 47(b) contains no language creating or suggesting a private right of action, and that the Second Circuit comes to the incorrect conclusion in its textual analysis of the statute. FSCO contends that the language of 47(b), which states that a court “may not deny rescission at the instance of any party,” only determines whether courts can offer equitable relief once a lawsuit has already been brought before the court. FSCO argues that the purpose of 47(b) is to create a uniform federal policy regarding rescission, thereby ensuring that state courts would not be able to alter or deny a party’s use of rescission as a defense. FSCO contends that Congress included no “rights-creating” language within 47(b), as “rights-creating language” is directed towards the individuals who will be protected, not towards courts or other regulating entities, and argues that the language of 47(b) is aimed specifically towards courts enforcing the ICA. Furthermore, FSCO claims that the reasoning of the Second Circuit’s decision, which relied upon a decision made in Transamerica Mortgage Advisors, Inc. v. Lewis (“TAMA”) in its interpretation of the language of 47(b), was incorrect. FSCO argues that TAMA, which found a private right of action in Section 215(b) of the Investment Advisers Act of 1940 (“IAA”), relied on specific language and context in the IAA that was not present in the ICA. Specifically, FSCO asserts that unlike 47(b), Section 215(b) expressly states that contracts violating the IAA “shall be void” – language that was replaced by an amendment to Section 47(b) with “unenforceable,” which implies materially different treatment and omits rights-creating language.

    Saba argues that the plain text of the ICA does, in fact, authorize a private right of action. Saba insists that the statute’s language, which provides for “rescission at the instance of any party,” has been historically used to refer to rights of action and therefore clearly gives all parties harmed by violations of the ICA the right to sue. Saba posits that if Congress had intended the statute to refer to a damages remedy, it would have provided express language in the statute relating to damages. Instead, Saba argues that the phrase “at the instance of any party” is a term of art from the Latin term ad instantiam partis and has been historically used by Congress to create rights in statutes. As evidence, Saba references Health & Hospital Corp. v. Talevski, in which the Supreme Court ruled that a provision creates a private right when it is “phrased in terms of the persons benefited” and contains “rights-creating,” individual-centric language with an “unmistakable focus on the benefitted class.” According to Saba, the statute’s requirement that courts grant rescission at the insistence of “any party” is clearly phrased in terms of persons benefitted (those harmed by contracts that violate the ICA), showing that the plain text of the statute authorizes a private right. Saba further argues that FSCO’s critiques of the Second Circuit’s ruling regarding TAMA are unpersuasive, as Sections 47(b) and 215(b) were originally enacted with the same language, on the same day and though the same Act of Congress. Therefore, according to Saba, the TAMA ruling illustrates that the text of Section 47(b) created a private right of action (at least, until the statute was amended in 1980).

    Discussion

    SEPARATION OF POWERS AND ENFORCEMENT

    In support of FSCO, the Chamber of Commerce of the United States argues judicial recognition of a private right of action places stress on the separation of powers. Similarly, writing in support of the FSCO, the Separation of Powers Clinic asserts that it is the job of Congress and the SEC, not courts, to consider questions of policy regarding ICA enforcement because private actions could conflict with SEC decisions and enforcement strategies. The Mutual Fund Directors Forum (“MFDF”), in support of FSCO, further asserts that private right of action is not necessary because investors are protected through independent directors and SEC oversight. According to MFDF, independent directors serve as “watchdogs” to protect shareholder interests and ensure fair dealings, while the SEC provides additional oversight and enforcement.

    In support of Saba, Marlton Partners, L.P. (“Marlton”) counters that judicial oversight does not encroach on legislative powers but rather upholds the constitutional principles to interpret federal law and hold investment management accountable. Additionally, Marlton asserts that warnings of destabilizing the otherwise “stable regulatory framework” are a pretense to avoid judicial oversight and maintain control over management contracts. Marlton also questions the role of independent directors as protecting investors, asserting that they have historically facilitated illegal practices. Furthermore,in support of Saba, ATG Capital Management LLC (“ATG”) explains that in light of the SEC’s narrowed enforcement of investment advisors, private shareholder lawsuits are necessary to deter inequitable practices and to protect investors and national public interest.  Securities-law scholars and former senior SEC officials (collectively “Securities-Law Scholars”), writing in support of Saba, posit that private suits are beneficial because they incentivize compliance with securities law.  Securities-Law Scholars assert that private suits supplement regulatory enforcement of securities law, which often faces limited resources and information. 

    IMPACT OF PRIVATE LITIGATION ON THE MARKET

    The United States, in support of writ for certiorari, contends that the threat of private right of action will lead to unpredictable impacts on millions of Americans’ mutual funds. TheInvestment Company Institute and others (collectively “ICI”), writing in support of FSCO, add that excessive private suits would function as a “back door” for private parties to challenge fund contracts with interests contrary to the interests of shareholders. ICI further argues that the long history of private litigation in the mutual-fund industry shows that such suits are often driven by self-interested agendas, including efforts by activist investors seeking large attorney-fee recoveries rather than true shareholder protection. Thus, ICI claims, this litigation will disrupt settled legal expectations and operations, generating market instability as shareholders divert their resources to litigation. ICI posits that private litigation will hurt long-term investors, have a chilling effect on innovation in new products or fund structures, and cause hesitancy in the market.

    Conversely, Marlton counters that the ICA’s core purpose was to protect investors from abusive conduct by investment advisers—not to shield shareholders from internal governance disputes—and that the legislative record demonstrates Congress enacted provisions like § 18(i) and the enforcement mechanism in § 47(b) specifically to address this adviser misconduct.  Additionally, Marlton argues that shareholder participation, particularly by activist investors, injects meaningful competition into an uncompetitive adviser market. Marlton explains that directors rarely replace advisers without shareholder activism, which holds managers accountable and promotes “value-maximizing actions.” Thus, according toMarlton, private enforcement suits would serve the interests of all shareholders by disciplining underperforming management and deterring entrenchment tactics. Marlton also asserts that the concept of “long-term individual investors” is a litigation-driven invention with no basis in market realities. Furthermore, Marlton contends that private suits will not lead to excessive litigation because courts are able to differentiate between legal and illegal conduct without causing “havoc.”

    Conclusion

    Authors

    Written by: Ria Panchal and  Brenda Narvaez

    Edited by:  Zaria Alyssa Goicochea

    Acknowledgments

    The authors would like to thank Professor Robert C. Hockett for his insights into this case.

    Additional Resources