Supreme Court Holds That There Is No Private Right of Action Under the Investment Company Act for Investors to Sue for Rescission of Contracts Alleged to Violate the Act

In a 6–3 decision, the Supreme Court held that the text of Section 47(b) of the Investment Company Act of 1940 (“ICA”) did not create an implied private right of action to allow investors to sue for rescission of contracts that allegedly violate the ICA, restricting enforcement to the Securities and Exchange Commission (“SEC”). The ruling resolves a circuit split and significantly narrows the avenues through which private parties can challenge the conduct of investment companies in federal court.

A number of managed closed-end mutual funds were sued by “activist investors” (investors that pursue a strategy of purchasing large stakes in underperforming closed-end funds, then pushing to alter the funds’ investment strategies or convert them to open-end funds) after the mutual funds adopted resolutions that would limit the activist investors’ rights. Specifically, the funds, which were incorporated in Maryland, passed a resolution adopting the Maryland Control Share Acquisition Act, under which the voting rights of shareholders who accumulate disproportionately large positions are limited. The activist investors sued the funds, asserting that the MCSAA resolution violated the ICA’s requirement that every share of stock issued by a registered investment company be voting stock with equal rights. The activist investors sought rescission of the MCSAA resolutions, asserting a claim pursuant to Section 47(b) of the ICA, which states that “a court may not deny rescission” of contracts made in violation of the ICA “at the instance of any party” unless the equities of the case and the purposes of the ICA favor denial.

Justice Barrett, writing for the majority and employing a textual analysis of the ICA, overturned both lower courts’ decisions that Section 47(b) provides a private right of action. The Court reiterated that for an implied right to be created, a statute must use “rights-creating language” directed at the individuals protected rather than the persons regulated by the statute. In addition, the presence of a comprehensive agency enforcement scheme weighs against finding an implied right.

Here, the key actor subject to the text of Section 47(b) is “a court,” not private individuals. The Court held that because the provision tells courts that they “may not deny” rescission under certain circumstances, it presupposes that parties are already before the court through some independent basis of jurisdiction and cause of action, not based on Section 47(b) itself. The Court also relied on the fact that the ICA identifies the SEC as the Act’s main enforcer and rescission is typically a remedy, not a cause of action. In addition, the Court pointed to the two express private rights of action present in the ICA, noting that the Court has “traditionally been reluctant to conclude that Congress implicitly created a private remedy in one provision when it explicitly did so in another.”

The Court rejected the activist investors’ argument that “at the instance of any party” created an implied right, explaining that this clause is “most naturally read to direct a court’s remedial power when a party before it is urging rescission” and says “nothing about conferring a right to sue in the first place.” The Court also found unpersuasive any reliance on a similar statute where an implied right of action was found because the language in the other statute that gave rise to the right, “shall be void,” was removed from the ICA in an amendment and replaced by the language at issue, stating that “changed language typically indicates changed meaning.” The majority opinion also disagreed that legislative history should play a role in the Court’s interpretation of the ICA, describing legislative history as “the equivalent of entering a crowded cocktail party and looking over the heads of the guests for one’s friends.”

The Court’s decision resolves a circuit split and provides clarity to those governed by the ICA. Private enforcement of the ICA is now limited to the two express causes of action Congress created: suits against investment advisers for breach of fiduciary duty (Section 36(b)) and actions to recover short-swing profits (Section 30(h)). This ruling dramatically reduces the scope of private litigation against registered investment companies. More broadly, the Court’s decision reaffirms the disfavored status of implied rights of action among the current majority on the Supreme Court.