The Supreme Court just made it significantly harder for shareholders to drag regulated investment companies into court. In a 6-3 decision issued on June 11, the Court ruled that Section 47(b) of the Investment Company Act of 1940 does not grant investors a private right of action, meaning they cannot sue registered investment companies to rescind bylaws or contracts they believe violate the statute.

What happened and why it matters

The case, FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., originated from a fight between activist investor Saba Capital Master Fund and 11 closed-end funds. Saba had challenged bylaws adopted by those funds that capped voting power for larger shareholders, a tactic that effectively insulated fund management from outside pressure.

Saba argued those bylaws violated the Investment Company Act and sued to have them tossed out. A lower court agreed, allowing the private lawsuit to proceed. The Supreme Court reversed that decision entirely.

Justice Amy Coney Barrett authored the majority opinion, joined by the Court’s conservative justices. The core reasoning: Congress never intended for Section 47(b) to serve as an invitation for private litigation. The enforcement mechanism Congress envisioned was the SEC, and the SEC alone.

The broader context for asset managers and ETF issuers

The Investment Company Act of 1940 is the foundational regulatory framework for mutual funds, closed-end funds, and exchange-traded funds. It governs everything from how funds are structured to how boards operate. For decades, there has been an open legal question about whether investors could use Section 47(b), which addresses void contracts, as a basis for private lawsuits.

The defendants in this case included funds linked to BlackRock and FS Credit Opportunities Corp. Saba Capital has been one of the more aggressive activist investors in the closed-end fund space. The firm’s strategy has frequently involved accumulating large positions in closed-end funds trading at discounts to net asset value, then pushing for changes, sometimes through litigation, to narrow those discounts. This ruling takes away one avenue for that playbook.

It’s worth noting what the ruling does not do. It does not prevent the SEC from enforcing the Investment Company Act. It does not eliminate other legal avenues shareholders might pursue, such as state law claims or actions under different federal securities statutes. What it does is remove the specific mechanism of private lawsuits under Section 47(b).

What this means for investors

For retail investors in mutual funds and ETFs, the immediate impact is likely minimal. Most individual shareholders were never going to file ICA lawsuits in the first place. The real shift is in the power dynamics between institutional activists and fund management teams.

The ruling also reinforces a broader trend in Supreme Court jurisprudence: narrowing implied private rights of action under federal securities laws. Over the past several decades, the Court has consistently pulled back from expansive readings of who can sue and under what statutes. This decision fits neatly into that trajectory.