The U.S. Supreme Court builds a legal moat for the fund industry: investors’ rights to sue privately face major restrictions.

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The U.S. Supreme Court has erected a legal barrier for mutual funds, closed-end funds, and ETFs, ruling that investors have no right to file private lawsuits over fund charters and management decisions under a federal law that is more than eighty years old.

On Thursday, the Supreme Court, in a 6-3 vote along party lines, dismissed a lawsuit brought by activist investors led by Boaz Weinstein’s Saba Capital Master Fund against eleven closed-end funds. Defendants included FS Credit Opportunities and affiliated funds under BlackRock.

The Court held that the 1940 Investment Company Act (ICA) does not authorize private lawsuits for most violations; such enforcement authority belongs to the U.S. Securities and Exchange Commission (SEC).

This case overturns a previous decision by the federal appeals court. The fund industry welcomed the outcome, viewing it as a way to effectively curb expensive lawsuits and eliminate regulatory uncertainty.

Meanwhile, both the Trump administration and the SEC supported the position of FS and BlackRock in court. SEC General Counsel Russell McGranahan said in a statement, “We are pleased the Court endorsed the Commission’s view on the scope of private lawsuits under the Investment Company Act.”

Saba’s Litigation Claims and the Maryland “Control Shares” Law Dispute

The core dispute in this case arose from Saba’s attempt to use the ICA to challenge relevant funds’ invocation of Maryland’s “control shares” statute. This state law stipulates that existing controlling investors can prevent other investors from obtaining more than 10% of voting shares.

Saba argued that this mechanism allows underperforming funds to evade accountability, while FS and BlackRock countered that the law helps funds maintain a long-term investment perspective and protects them from arbitrageurs seeking short-term profits.

Legally, Saba cited an ICA clause regarding “equal voting rights,” and also argued that the congressional provision allowing courts to void fund contracts implicitly authorized private lawsuits.

FS and BlackRock maintained that the voiding provision merely provides procedural rules for state courts handling such cases and does not, in itself, authorize lawsuits.

Supreme Court Majority Opinion: No Private Enforcement Authorized by Law’s Text

Justice Amy Coney Barrett wrote the majority opinion, stating, “The text and structure of the ICA show no indication that Congress authorized private parties to enforce nearly all its provisions.”

Three liberal justices dissented. Justice Ketanji Brown Jackson, in her dissent, wrote, “The proper role of the Court is to effectuate the will of the people, not to override it.” She argued the majority ignored congressional intent and the language of the 1940 law.

As a matter of precedent, in 1979 the Supreme Court held that the Investment Advisers Act, passed around the same time as the ICA, included a private right of action, allowing investors to seek contract rescission (but not damages).

However, in recent years, the Court has moved toward a more conservative stance—unless Congress explicitly authorizes it in law, private causes of action are not recognized.

Mutual Fund Industry Welcomes Ruling, Weinstein Urges SEC Action

The fund industry reacted positively to the ruling. The Investment Company Institute, which represents the sector, stated:

“Allowing such lawsuits would bring significant regulatory uncertainty and high litigation costs, ultimately harming fund shareholders’ interests.”

Skadden Arps attorneys Shay Dvoretzky and Eben Colby, representing the closed-end funds, also called it a “landmark decision” that will protect funds and their boards from litigation threats.

Weinstein, in a statement, emphasized that the Court only ruled investors cannot sue and made no substantive judgment on whether closed-end funds violated ICA provisions. He urged the SEC to fulfill its investor protection duty:

“These are protections written into law by Congress over 80 years ago—they are not optional. The evidence of shareholder harm is clear and the SEC has no reason not to act.”

The case is FS Credit Opportunities Corp. v. Saba Capital Master Fund, No. 24-345.

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