Supreme Court Rules That Section 47(b) of the Investment Company Act of 1940 Provides No Private Right of Action

On June 11, 2026, the Supreme Court ruled that Section 47(b) of the Investment Company Act of 1940 (ICA), which governs mutual funds and other registered investment companies, does not provide private parties with a right to sue others for violations of the ICA.¹ The Court’s ruling resolves a seven-year-old Circuit split over whether Section 47(b) provides such a right and deprives the plaintiffs’ bar of a potential mechanism to initiate litigation against industry participants for alleged ICA violations. The Court’s opinion confirms that authority for enforcement of the ICA – including the power to bring actions against violators of the statute – lies with the Securities and Exchange Commission (SEC) and that private parties lack that power, except in narrow statutorily defined circumstances.

Background

As the Court explained, the ICA “comprehensively regulates investment companies,” including, among other things, mutual funds, exchange-traded funds (ETFs), and closed-end funds. The SEC “bears primary responsibility for ensuring compliance with the ICA” and may bring actions for violations of the statute. In contrast, private parties generally do not have the right to bring actions for violations of the ICA, except where Congress has created such a right. Although Congress expressly created two private rights of action — one under Section 36(b) for a fund’s shareholders to sue an investment adviser for breach of fiduciary duty with respect to advisory fees and another under Section 30(h) for recovery of short-swing profits under certain circumstances — it was generally understood that Congress had not created a private right of action to enforce any other sections of the ICA.

In 2019, however, the U.S. Court of Appeals for the Second Circuit ruled that Section 47(b) of the ICA provides a private right of action for rescission of contracts that allegedly violate other sections of the ICA.² That ruling conflicted with decisions by the U.S. Courts of Appeals for the Third, Fourth, and Ninth Circuits, which rejected a private right of action under Section 47(b).³

Section 47(b) provides, in relevant part, that:

A contract that is made, or whose performance involves, a violation of [the ICA] ... is unenforceable by either party ... To the extent that [such] a contract ... has been performed, a court may not deny rescission at the instance of any party unless ... denial of rescission would produce a more equitable result ...⁴

The Second Circuit interpreted the phrase “a court may not deny rescission at the instance of any party” to mean that a party to a contract could bring an action for rescission if the contract violated other sections of the ICA. In contrast, the Third, Fourth, and Ninth Circuits held that Section 47(b) provided a rescission remedy but did not create a private right of action.

Some members of the plaintiffs’ bar seized on the Second Circuit’s 2019 decision to bring private actions for alleged violations of other sections of the ICA. For example, the plaintiff who brought this case is an institutional investor and closed-end fund activist who challenged certain anti-takeover measures adopted by closed-end fund boards so that it could take a controlling interest in those funds and then arbitrage the difference between the market price for fund shares and their net asset value. The activist contended that the anti-takeover measures violated ICA Section 18(i), which requires that “every share of stock … issued by a registered management company … shall be a voting stock and have equal voting rights with every other outstanding voting stock.” The activist further contended that the anti-takeover measures were part of the funds’ governance documents that constituted a contract between each fund and its shareholders and that the activist therefore had a private right of action under Section 47(b) to seek rescission of those anti-takeover measures.

The activist commenced litigation against the funds in federal district court in New York. The district court ruled that Section 47(b) provided the activist with a private of right action, that the anti-takeover measures violated Section 18(i), and that, therefore, the anti-takeover measures should be rescinded. Relying on its 2019 decision, the Second Circuit affirmed. The funds then sought and obtained Supreme Court review.

The Supreme Court’s Opinion

In a six-to-three decision, the Supreme Court decided that Section 47(b) does not “empower[] private parties to sue for rescission of ... contract[s] that allegedly violate” other sections of the ICA. According to the Court, rather than creating a right to sue, Section 47(b) provides rescission as a potential remedy. The Court, therefore, held that the Second Circuit’s interpretation of Section 47(b) was incorrect and reversed the Second Circuit’s judgment against the funds that had adopted the anti-takeover measures.

Like the lower courts, the Supreme Court focused on the language in Section 47(b) stating that “a court may not deny rescission at the instance of any party.” The Court explained that “contract law treats rescission as remedy, not a cause of action,” and that Section 47(b)’s reference to “any party” means any party before a court in an existing action, not any party to a contract. Thus, for example, “[a] party to a contract may bring an action under state law ... for breach of contract ... and ask the court to undo the contract,” or a defendant in such an action could seek rescission as an affirmative defense. The Court held, however, that a plaintiff cannot rely on Section 47(b) as a basis to get into court in the first place. The Supreme Court also held that the structure of the ICA “points in the same direction.” Congress vested the SEC with “primary responsibility for ensuring compliance with the ICA” but created express rights of action under Sections 36(b) and 30(h), demonstrating that Congress knew how to create rights of action when it wanted to.

The Supreme Court rejected the activist’s arguments and, in particular, its reliance on a 1979 Supreme Court case⁵ that held that Section 215 of the Investment Advisers Act of 1940, which includes language similar to that in Section 47(b) of the ICA, did create a private right of action to void advisory contracts that violate the Advisers Act. Distinguishing that 1979 decision, the Supreme Court explained that Congress amended Section 47(b) in 1980 such that the language in that section no longer so closely mirrored Section 215’s language.

The majority opinion also rejected an argument raised by two of the three dissenting justices that the House and Senate committee reports discussing the 1980 amendment demonstrate that Congress intended to preserve implied rights of action that existed under the original statute. The majority opinion found that legislative history insufficient to imply a right of action when Congress could have made such a right express. The majority opinion noted the committee reports’ explanation that the amendment to Section 47(b) was intended “to provide clearer statutory guidance in interpreting th[e] equitable rescission remedy” and did not mention a right of action.

Ramifications of the Decision

The most immediate effect of the Supreme Court’s decision is to deprive activist investors of the ability to use Section 47(b) to challenge anti-takeover provisions adopted by the boards of closed-end funds. More broadly, the decision confirms that it is the SEC, and not private litigants, who can commence litigation for violations of the ICA. To the extent that the plaintiffs’ bar viewed Section 47(b) as a potential vehicle to bring litigation premised on alleged violations of the ICA, the Supreme Court’s decision makes clear that they cannot.