K&L Gates Successfully Represents Closed-End Funds in US Supreme Court Case on Investment Company Act

Global law firm K&L Gates LLP represented two closed-end funds in a significant US Supreme Court case, FS Credit Opportunities Corp. et al. v. Saba Capital Master Fund, Ltd., et al., in which the Court held that Section 47(b) of the Investment Company Act of 1940 (Act) does not provide an implied private right of action for parties seeking rescission of contracts. The decision resolves a circuit split and has important implications for the asset management industry, including reaffirming that Congress determines when private parties may bring claims under federal securities laws, and that the Securities and Exchange Commission (SEC) has the primary role in enforcing the Act.

The case arose from challenges by an activist investor seeking to invalidate governance provisions adopted by closed-end funds, and relied on Section 47(b) to bring the claims. The Supreme Court reversed the lower court ruling, holding that Section 47(b) does not authorize private lawsuits to rescind contracts alleged to violate the Investment Company Act.

K&L Gates represented two of the four petitioners in the case and was involved in the litigation from the District Court through the US Court of Appeals and ultimately before the Supreme Court. The team, led by Washington, DC partners Steve Topetzes, Jennifer Gonzalez, and Varu Chilakamarri, included lawyers from the firm’s Policy and Regulatory, Appellate, and Asset Management and Investment Funds practices, reflecting the firm’s depth in complex regulatory and appellate matters.

In a joint statement, the K&L Gates team remarked: “Congress says what it means, and it means what it says. By reinforcing the now-established general rule against implied private rights of action, the Court has restored some stability to the registered fund space. The notion that activist shareholders or others could pursue a broad range of claims to rescind contracts, bylaw provisions, or other agreements they deem to violate any provision of the Investment Company Act not only undermined the Congressionally-determined role of the SEC as the enforcer of the statute, but also threatened a wide range of improper attacks on closed-end funds, mutual funds, exchange-traded funds, and other investment companies or businesses covered by the Act.”

The decision is expected to have a significant impact on private litigation involving registered investment companies by limiting the ability of private plaintiffs to bring claims under Section 47(b) and reinforcing existing statutory boundaries.