At Supreme Court Argument, Justices Divided Over Whether Investment Company Act Gives Shareholders a Federal Right to Sue for Rescission

The underlying dispute involves Saba Capital Master Fund, a shareholder that allegedly acquired a significant stake in certain closed-end funds and then challenged fund bylaws that, according to Saba, stripped large shareholders of their voting rights. Saba argued the bylaws violated Section 18(i) of the ICA and sought rescission under Section 47(b). The petitioners — FS Credit Opportunities Corp. and BlackRock respondents supporting the petitioners — contend that Section 47(b) creates no private right of action and that Saba has no basis to bring an affirmative federal suit.

Counsel for the petitioners, Shay Dvoretzky, argued that Congress deliberately moved away from the word "void" — the language the Court relied on in Transamerica Mortgage Advisors, Inc. v. Lewis to hold that an implied rescission right existed under the Investment Advisers Act — and replaced it with "unenforceable," an inherently defensive concept. He contended that Section 47(b)(2)'s reference to rescission at the instance of any party is court-focused language telling judges what to do once parties are already before them, not a grant of a right to sue. The United States, appearing as amicus supporting the petitioners, agreed that the post-1980 ICA does not meet the standard to imply a private right of action and that the Second Circuit's judgment should be reversed.

Paul Clement, arguing for Saba, disputed the textual argument, contending that the roughly 120 words Congress added in 1980 by his rough count — including explicit references to rescission by any party, severability, and unjust enrichment — all presuppose a rescission remedy and amount to an express cause of action rather than an implied one. He argued the SEC itself described it as an express remedy multiple times in an amicus brief filed in the Olmsted litigation in 2001, and that the House and Senate reports accompanying the 1980 amendments stated the changes were designed to provide clearer statutory guidance in interpreting the equitable rescission remedy, not to eliminate it.

Justice Kavanaugh described the case as "extremely close" and pressed both sides on the practical consequences of ruling for the petitioners. He noted that Transamerica's Footnote 8 had flagged as anomalous any construction that would remit a federal right to state court, and questioned how a rescission action would actually function in state court. Dvoretzky acknowledged he was unaware of any state cause of action that would permit the kind of suit Saba brought, and suggested that an affirmative state-law rescission action would likely be preempted by the ICA's comprehensive scheme — a position Justice Kavanaugh noted appeared potentially inconsistent with the petitioners' textualist approach.

Justice Sotomayor pressed Dvoretzky on the 1980 legislative history, reading from both the House and Senate reports. The Senate report stated that private rights of action should be implied to the same extent that such causes of action are implied under the ICA, and the House report stated that courts should imply private rights of action under the legislation where the plaintiff falls within the class of persons protected by the statutory provision in question. Dvoretzky responded that under Sandoval, the analysis begins and ends with text and structure, and that the legislative history cited was general language covering six different statutes simultaneously amended, with the specific discussion of Section 47(b) making no mention of a private right of action.

Justice Kagan questioned whether the change from "void" to "unenforceable" could simply reflect the need to accommodate the new "unless" clause — which conditions rescission on equitable balancing — rather than a congressional intent to eliminate the remedy, and suggested it would be a striking result to read identical language in two companion statutes passed the same day as producing opposite outcomes. Justice Barrett asked whether the cause of action Saba seeks would sweep far more broadly than the narrow remedy recognized in Transamerica, given that Section 47(b) is not limited to a particular class of plaintiffs or a specific statutory provision. The government agreed that potential breadth was a reason Congress may have pulled back in 1980.