The US Supreme Court has ruled six to three in FS Credit Opportunities Corp v Saba Capital Master Fund that private investors cannot bring suit to rescind contracts that violate the Investment Company Act of 1940, confirming that only the Securities and Exchange Commission holds enforcement authority under the relevant statutory provision in a decision that materially reduces litigation exposure for investment companies operating under the Act.
Justice Amy Coney Barrett wrote for the majority, framing the case as a straightforward question of interpretive methodology. The majority held that because Congress designated the SEC as the primary enforcer of the Investment Company Act and expressly permitted shareholders and issuers to enforce two specific provisions of the statute, no implied private right of action should be read into a third provision dealing with rescission of contracts inconsistent with the Act.
The majority’s analysis turned on the distinction between remedies and causes of action — the relevant provision directs courts not to deny rescission where a party requests it, but presupposes parties are already before the court on some other basis rather than conferring a standalone right to sue.
Barrett distinguished the court’s 1979 decision in Transamerica Mortgage Advisors v Lewis, which had recognised a similar private right of action in a companion statute with identical phrasing at the time, on the basis that significant post-1979 amendments to the Investment Company Act changed the meaning of the relevant provision. The majority described the statutory changes as a renovation rather than a new coat of paint — sufficient to deprive the earlier precedent of continuing force.
Justice Ketanji Brown Jackson dissented, joined by Justice Sonia Sotomayor and in part by Justice Elena Kagan. The dissent argued the majority had misread the statutory text and structure and that legislative history confirmed Congress had contemplated a private enforcement mechanism. The majority rejected both the dissent’s textual reading and its reliance on legislative history, with Barrett reaffirming that courts are governed by the laws enacted rather than by legislators’ intentions.
The practical consequence of the ruling is significant for investment management legal teams. Investment companies that might previously have faced rescission claims brought by disgruntled investors alleging Investment Company Act violations now know that only the SEC can pursue such claims — a materially lower litigation risk profile.
For securities law practices at firms including Sullivan & Cromwell, Latham & Watkins and Cleary Gottlieb, which advise the largest investment management platforms, the ruling clarifies the enforcement framework and reduces the class action exposure that a contrary ruling would have generated. In-house counsel at registered investment companies and closed-end funds should review their compliance frameworks against SEC enforcement priorities rather than private litigation risk as the primary regulatory exposure metric following this decision.