SCOTUS Devastates Dems With 6-3 Decision — Follow The Law

The U.S. Supreme Court delivered a major victory for investment firms and a significant setback for activist hedge funds this week, ruling that shareholders cannot use a key provision of federal law to launch private lawsuits seeking to unwind investment contracts.

In a 6-3 decision, the 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 they claim violate the law.

The ruling in *FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd.* overturns a previous decision from the Second Circuit Court of Appeals that had opened the door for activist investors to challenge corporate actions through private litigation.

The case centered on efforts by Saba Capital, a well-known activist hedge fund, to challenge actions taken by several closed-end investment funds. The dispute arose after certain funds adopted protections designed to prevent activist investors from gaining outsized control over fund operations and forcing changes that management argued were not in the best interests of long-term shareholders.

Writing for the majority, Justice Amy Coney Barrett delivered a forceful defense of the principle that Congress—not courts—determines who has the authority to enforce federal statutes.

“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 continued.

“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.

Joining Barrett in the majority were Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito, Neil Gorsuch, and Brett Kavanaugh.

The dispute originated when Saba Capital challenged decisions by several investment funds, including entities affiliated with FS Credit Opportunities and BlackRock. The funds had adopted provisions under Maryland’s Control Share Acquisition Act, which restricts voting power for large shareholders who acquire significant ownership stakes.

Supporters of such measures argue they help protect funds from hostile takeovers and activist campaigns designed to generate short-term profits at the expense of long-term investors.

Saba argued that the voting restrictions violated Section 18(i) of the Investment Company Act and sought rescission under Section 47(b). Lower courts had sided with the hedge fund based on prior precedent in the Second Circuit.

The Supreme Court, however, rejected that interpretation.

Barrett emphasized that Section 47(b) discusses remedies available once parties are already properly before a court, rather than creating a new legal right for private individuals to initiate lawsuits.

“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 reflects the Roberts Court’s broader commitment to textualism—a judicial philosophy that focuses on the actual language enacted by Congress rather than allowing courts to create new legal rights not expressly provided by lawmakers.

The ruling also reinforces the Securities and Exchange Commission’s role as the primary enforcement authority under the Investment Company Act.

“Private litigants sometimes sue to enforce statutes that lack comparable language,” Barrett noted while rejecting the notion that courts should infer additional causes of action where Congress did not explicitly provide them.

The implications of the decision extend far beyond this particular dispute. Legal experts say the ruling will affect a wide range of investment vehicles, including closed-end funds, mutual funds, business development companies, and other investment structures that collectively manage trillions of dollars in assets.

Supporters argue the decision will provide greater stability for investors by preventing activist hedge funds from using federal courts to pressure companies into restructurings, liquidations, board shakeups, or other actions designed to boost short-term returns.

Industry groups quickly welcomed the outcome. The Investment Company Institute praised the decision, arguing that it preserves the Investment Company Act’s carefully designed regulatory framework and prevents an explosion of private lawsuits that could create uncertainty throughout the industry.

Attorneys representing the funds described the ruling as a major victory for the registered investment fund industry and one that removes a powerful legal weapon previously available to activist investors.

For millions of Americans who invest through retirement accounts, pension funds, and diversified investment portfolios, supporters say the decision promotes predictability and long-term stability by allowing professional regulators—not private litigants—to serve as the primary enforcers of federal investment laws.

The ruling also continues a broader trend at the Supreme Court of limiting judicially created causes of action and reinforcing the principle that Congress must clearly authorize private lawsuits if it intends for them to exist.

For businesses, investment managers, and market participants, the decision provides additional clarity regarding who can enforce federal securities laws and further underscores the Court’s view that policy decisions belong to lawmakers, not judges.