Introduction
On June 30, 2025, the U.S. Supreme Court granted cert to hear a case that could significantly impact how registered investment funds—particularly closed-end funds—manage shareholder rights and defend against activist investors. The case, FS Credit Opportunities Corp. v. Saba Capital Master Fund Ltd., centers on whether fund shareholders may bring a private right of action directly under Section 47 of the Investment Company Act of 1940 (ICA) to rescind fund governance bylaws or decisions that they allege violate the ICA’s shareholder voting rights requirements.
The outcome could either reinforce the U.S. Securities and Exchange Commission’s (SEC’s) exclusive role in enforcing the ICA or open the door to more shareholder litigation challenging registered funds’ governance practices. The SEC has filed an amicus brief arguing that Section 47 does not authorize a private right of action, which is consistent with other efforts by the SEC under the Trump Presidencies to limit the activities of activist investors with respect to closed-end funds and issuers generally.
What’s the Case About?
Saba Capital, a hedge fund known for activist investing, sued several closed-end funds after they adopted control share provisions under Maryland law. These closed-end funds’ control share provisions limit the voting rights of shareholders who acquire large stakes (10% or more), unless approved by other shareholders, pursuant to Maryland law. The closed-end funds assert that they implemented these measures to protect long-term investors from short-term activist strategies.
Saba alleges that the control share provisions violate Section 18(i) of the ICA, which requires that all shares of a registered investment company are voting shares and that they all have equal voting rights with other outstanding shares. Saba is seeking to rescind the control share provisions under Section 47(b) of the ICA.
The legal question is whether Section 47(b) allows private investors like Saba to bring such lawsuits—or whether only the SEC can enforce this provision.
Where the Courts Stand
- Second Circuit: Ruled in favor of Saba. It held that Section 47(b) allows private parties to sue for rescission of contracts or resolutions that violate the ICA. This is the current law in New York and other states in the Second Circuit.
- Third and Ninth Circuits: Have ruled the opposite, holding that Section 47(b) does not provide shareholders with the right to sue—only the SEC can enforce it. This is the current law in the Third and Ninth Circuits, which includes Delaware, New Jersey, and California.
- Supreme Court: Will resolve the Circuit split. Its decision will apply nationwide.
Relevant Parties and Arguments
Petitioners (FS Credit Opportunities and other closed-end funds):
- Argue that only the SEC may file a lawsuit to enforce Section 47(b) of the ICA.
- Assert that allowing private lawsuits would destabilize fund governance and invite litigation from activist investors.
- Emphasize that Congress explicitly allowed private lawsuits only in one part of the ICA (Section 36(b))—and chose not to do so in Section 47(b).
Respondents (Saba Capital):
- Argue that the text of Section 47(b) implies a right to sue, since it says courts “may not deny rescission at the instance of any party.”
- Contend that the right is narrow—limited to rescinding illegal contracts or resolutions, not seeking damages.
- Claim that this right is essential to protect shareholders when the SEC declines to act.
U.S. Government (Solicitor General and SEC):
- Supports the funds’ argument that the Second Circuit decision should be overturned.
- Argues that Section 47(b) does not authorize private lawsuits.
- Warns that allowing such suits could interfere with the SEC’s discretion and create regulatory uncertainty.
The SEC’s Position in Context
Closed-end funds such as the funds involved in these cases can be particularly influenced by activist investors because of the nature in which they operate. These funds are listed on an exchange, issue a finite number of shares, and do not regularly redeem outstanding shares, which can result in shares of these funds trading at a discount or a premium to the value of their underlying assets. The number of such closed-end funds has declined over the years, which some market participants attribute at least in part to pressure from activist investors.
The SEC’s position in its amicus brief arguing that Section 47(b) does not confer a private right of action is consistent with prior efforts by the SEC during the first Trump Presidency to limit the influence of activist investors in closed-end funds. Specifically, in 2018, an SEC staff statement withdrew a prior staff no-action letter from 2010 (Boulder Total Return Fund) that a closed-end fund’s opting to use a state law that restricts the ability of certain investors to vote control shares was inconsistent with the requirement of Section 18(i) of the ICA that each share of an investment company have “equal voting rights.” In the 2018 statement, the staff took the position that it would not recommend an enforcement action against a closed-end fund under section 18(i) of the ICA for opting in to and triggering a control share statute if the fund board’s decision to do so was taken with reasonable care and consistent with the board’s fiduciary duties to the fund and shareholders and other applicable laws.
The SEC’s position in the amicus brief is also consistent with other recent measures by the SEC that can have the effect of limiting shareholder engagement more broadly. For example, in February 2025 the SEC staff posted an FAQ clarifying the type of actions by an investor to engage with an issuer that would constitute being for the purpose of, or having the effect of, changing or influencing control of the issuer and thus may subject the investor to the more onerous 13D filing instead of the short-form 13G filing. This measure chilled engagement between large passive investors and issuers during the 2025 proxy season. Also in February 2025, the SEC published Staff Legal Bulletin 14M, which reversed a prior SEC position and said that issuers’ requests to exclude shareholder proposals that raise “significant policy issues” or had “broad societal impact” would be considered on a case-by-case basis under the “economic relevance” and “ordinary business” tests pursuant to Rule 14a-8. For further discussion of these developments and their implications, see Freshfields’ Trends and Updates from the 2025 Proxy Season.
Why This Matters to Investment Funds and Investment Advisers
If the Supreme Court sides with Saba, it could:
- Empower activist investors to challenge fund governance provisions and decisions in court, particularly for closed-end funds.
- Increase litigation risk for funds that adopt control share provisions or other defensive measures and potentially for funds’ investment advisers that facilitate the adoption of such measures.
- Increase the burdens and potential liability for funds, fund directors, and their investment advisers generally. While the closed-end funds most affected by this litigation are not the type of registered funds that sponsors have typically used to increase retail investors’ and registered funds’ access to alternative investments, a decision that alters investment company governance and litigation more broadly could impact such retailization efforts by sponsors.
- Undermine the SEC’s role as the primary enforcer of the ICA.
If the Court rules in favor of the closed-end funds, it would:
- Reinforce the SEC’s exclusive authority to enforce the ICA. Importantly, investment funds and investment advisers would still be subject to oversight by the SEC, including exams by SEC exam staff, to confirm that funds’ governance is consistent with applicable fiduciary duties in light of the particular facts and circumstances.
- Limit fund investors’ litigation under Section 47(b).
- Provide greater certainty for funds adopting governance protections.
Key Questions Going Forward
- Will the Court interpret Section 47(b) as a standalone right for investors to bring a private right of action?
- Could a ruling for Saba lead to challenges against other fund practices, such as fee arrangements[1] or board structures?
- How will this affect state corporate laws, like Maryland’s control share statute, when applied to funds that are subject to the ICA?
What Should Funds Be Doing Now?
- Review your bylaws and governance policies, especially if you’ve adopted control share provisions.[2]
- Monitor the Supreme Court’s docket—a decision is expected in the 2025 term.
- Engage with counsel to assess litigation risk and regulatory risk.
If you have questions about how this case may affect your fund or would like assistance reviewing your governance framework, please contact us.
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[1] Section 36(b) of the ICA authorizes investment fund shareholders to bring a private right of action against a fund’s investment adviser, directors, and officers, among others, for a breach of fiduciary duty with respect to the receipt or payment of compensation for investment advisory and other services. However, Section 36(b) claims typically have been resolved in favor of the defendants rather than the shareholder plaintiffs.
[2] Approximately half of the States have control share provisions similar to the Maryland statute at issue in the FS Credit Opportunities Corp. litigation, including the States where the substantial majority of closed-end funds are organized – Maryland, Delaware, and Massachusetts. The specific control share provisions vary by State. Generally a control share statute applies to closed-end funds and other companies organized in that State, but not to open-end funds (i.e. mutual funds and ETFs) organized in that State. Some States’ control share statutes apply automatically to companies formed under the laws of that State but permit a company to opt-out of the control share limitations. In other States, a company must affirmatively opt into the statute’s control share provisions.
