Justices to review whether private parties may sue investment companies

The justices will be treading on familiar ground during next week’s argument in FS Credit Opportunities Corp. v Saba Capital Master Fund, to take place on Wednesday, Dec. 10. Like many cases the court has heard in the last decade, this one asks the justices to consider whether the federal courts should recognize a federal statute as implying a private right of action (that is, providing the ability for private parties to sue) when the words of the statute do not explicitly authorize it.

The particular statute here is the Investment Company Act, adopted with the Investment Advisers Act in 1940, following the Securities Act of 1933 and the Securities Exchange Act as among the last of the major securities statutes passed during the tenure of Franklin Roosevelt. The statute imposes various safeguards on investment companies, generally designed to protect third-party investors from self-dealing conduct at the hands of insiders of the investment companies. To that end, the statute vests broad regulatory authority in the Securities Exchange Commission, which has the ability to investigate, monitor, and take action against conduct it believes violates the statute.

The particular provision in question, Section 47(b), authorizes courts to rescind any contract that violates any of the specific provisions of the statute. The lower courts held that this authorized an independent suit by investors seeking to rescind a contract that they allege violates the statute, even though the SEC has not taken any action. When the lower courts allowed that suit to proceed, the justices agreed to review the case.

The fund (FS Credit Opportunities Corp.) characterizes the lower court decision as emblematic of the “ancien regime” that the justices have been criticizing for the last few decades, in which the court frequently implied private rights of action, especially in cases involving securities litigation. As so many of the court’s opinions have emphasized in recent years, that regime is now a distant memory. Because the statute does not contain the kind of language that creates a private right of action – identifying particular plaintiffs and authorizing them to bring a suit for some specified reason – the fund argues that there is no basis in the court’s modern jurisprudence for what the lower courts have done here. That result is particularly appropriate in this case, the fund says, because the statute does include two explicitly crafted private rights of action, neither of which would apply to this dispute.

The investors (including Saba Capital Master Fund) rest their case on the court’s 1979 decision in Transamerica Mortgage Advisors v. Lewis. A closely divided court in that case recognized a limited private right of action to rescind unlawful contracts, based on a provision of the Investment Advisers Act that closely resembles the provision at issue here. For the investors, there is no basis for treating this statute any differently than the provision at issue in Transamerica.

For its part, the fund forcefully rebuts the investors’ reliance on Transamerica. They emphasize that the justices in Transamerica distinguished the Investment Advisers Act (at issue in Transamerica) from the Investment Company Act (at issue here) because the Company Act includes explicit private rights of action for specified situations. The lack of those statutory rights of action in the Advisers Act, the fund argues, made it much easier to imply a private right of action in Transamerica than it should be here.

When you read that the question presented is whether the justices should imply a private right of action, you have to know that there will be some skeptical questioning from the justices. I expect that Paul Clement (who represents the investors) will face some pretty tough questioning on that point next week, just as he did in Cox this past Monday.