Supreme Court & Investment Litigation Funding – ICA Case

Supreme Court to Weigh in on Investment Company Act Lawsuits

Washington D.C. – The U.S. Supreme Court has agreed to hear a landmark case concerning shareholder rights and the enforcement of the Investment Company Act (ICA) of 1940. This decision, announced June 30th, 2025, centers on whether Section 47(b) of the ICA grants shareholders a private right to sue registered investment companies for alleged violations. The outcome coudl reshape the landscape of investment fund regulation and litigation.

Circuit Split Leads to Supreme Court Intervention

The case, FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., aims to resolve a conflict among the circuit courts. The Second Circuit Court of Appeals has, since 2019, recognized a private right of action under Section 47(b), diverging from other circuits that have rejected this interpretation.This split has created uncertainty for registered funds, including mutual funds and Exchange-traded Funds (ETFs). The Supreme court’s decision, expected in its October 2025 term, will have critically important implications for the entire fund industry.

At the heart of the matter is whether shareholders can bypass the Securities and Exchange Commission (SEC) and directly sue investment companies for violations of the ICA.

The Core of the Dispute: Section 47(b) and Private Rights of Action

While the ICA explicitly grants shareholders the right to sue for excessive advisory fees under Section 36(b), established through a 1970 amendment, other potential avenues for private lawsuits have been curtailed. The Second Circuit’s 2019 ruling in Oxford University Bank v. Lansuppe Feeder, LLC introduced a notable exception. This ruling recognized an implied private right of action under Section 47(b), which prohibits the enforcement of contracts involving ICA violations. The Second Circuit reasoned that this provision implied Congressional intent to allow lawsuits seeking “rescission” of contracts linked to alleged ICA breaches.

This interpretation has opened the door for activist investors, such as Saba Capital, to challenge closed-end fund bylaws, arguing they violate other ICA provisions related to fund capital structure and board elections. Critics argue that these litigations are part of an “arbitrage strategy” designed to dismantle funds for short-term profits, potentially harming long-term shareholders.

Industry Concerns and Potential Consequences

Organizations like the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA AMG) have voiced concerns, arguing that a broad interpretation of Section 47(b) could lead to a flood of litigation. they highlight that nearly all fund management and operational tasks are outsourced to investment advisors or service providers under written agreements. Granting shareholders the right to sue for “rescission” of these agreements based on alleged ICA violations, irrespective of the SEC’s stance, could create limitless litigation opportunities.

The registered fund industry relies on a stable regulatory framework shaped by decades of SEC rulemaking and guidance. Allowing private litigation to challenge these interpretations could create uncertainty,stifle innovation,and ultimately harm shareholders. The Supreme Court’s ruling in FS Credit Opportunities Corp. is, therefore, a crucial event for the financial sector.

Potential Impact on Registered Funds

The Supreme Court’s decision could have far-reaching consequences, not just for closed-end funds but for all registered funds, including mutual funds and ETFs. The potential for increased litigation could lead to higher costs for funds, which could ultimately be passed on to investors.

Did You Know? The Investment Company Act of 1940 was enacted in response to abuses in the investment company industry during the Great Depression.

The current regulatory landscape emphasizes the SEC’s role in enforcing the ICA. A ruling that expands private rights of action could shift the balance of power, giving shareholders a greater ability to influence fund management and operations.

Looking Ahead

The Supreme Court’s decision in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd. will be closely watched by the investment community. The outcome will have significant implications for the regulation of registered funds and the rights of shareholders.

What are your thoughts on shareholder activism? Do you beleive individual investors should have more power to challenge fund management practices?

How might increased litigation affect the costs and returns of your investments?

Key Arguments in the section 47(b) dispute

Argument	Proponents	Opponents
Private Right of action	second Circuit Court of Appeals, Activist investors	Other Circuit Courts, Investment company Institute (ICI), SIFMA AMG
Impact on Fund Regulation	Shareholder Empowerment	Regulatory Uncertainty, Increased litigation
SEC Enforcement	Primary Enforcement authority	Potential for Bypassing SEC Expertise

Understanding the Investment Company Act of 1940

The Investment Company Act of 1940 (ICA) is a cornerstone of U.S. financial regulation, designed to protect investors in investment companies, such as mutual funds and closed-end funds. The ICA requires these companies to register with the SEC and adhere to specific rules regarding their structure, operations, and disclosures.

Key provisions of the ICA include rules on:

• Fund governance and management
• Capital structure and leverage
• Transactions with affiliates
• valuation of assets
• Disclosure of information to investors

Pro Tip: Investors can access information about registered investment companies through the SEC’s EDGAR database.

Frequently Asked Questions About Investment Company Act Lawsuits

• What is the Investment Company Act of 1940? The Investment Company Act of 1940 (ICA) is a U.S.federal law designed to regulate investment companies, including mutual funds and closed-end funds, to protect investors.
• What is Section 47(b) of the Investment Company Act? Section 47(b) of the ICA concerns contracts whose performance involves a violation of the Act, and whether shareholders have a private right to sue based on alleged violations.
• Why is the Supreme Court hearing a case about the Investment Company Act? The supreme Court is hearing the case to resolve a split among the circuit courts regarding whether Section 47(b) implies a private right of action for shareholders.
• What are the potential consequences of the Supreme Court’s decision on Investment Company Act Lawsuits? The decision could significantly impact the regulation of registered funds, the rights of shareholders, and the potential for increased litigation within the investment industry.
• How does the SEC play a role in enforcing the Investment Company Act? The SEC has the primary regulatory authority to enforce the ICA through rulemaking, exemptive orders, no-action letters, and other guidance.
• What is a private right of action under the Investment Company Act? A private right of action allows individual shareholders to bring lawsuits against investment companies for alleged violations of the ICA, independant of SEC enforcement.
• What types of funds could be affected by this Supreme Court decision on Investment Company Act lawsuits? The decision could affect all registered funds, including mutual funds, exchange-traded funds (ETFs), and closed-end funds.

Share your thoughts and comments below. how do you think the Supreme Court should rule in this case?

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Supreme Court & Investment Litigation Funding: the PACCAR Case & damages-Based Agreements

the landscape of investment litigation in the UK has been substantially reshaped by the Supreme Court’s ruling in the PACCAR Inc. and others v Competition Appeal Tribunal case. This decision has direct implications for investment litigation funding, particularly concerning Damages-Based Agreements (DBAs).

Understanding Investment litigation Funding

Investment litigation funding plays a crucial role in enabling claimants, particularly those lacking the financial resources, to pursue complex legal actions. This allows access to justice for investors who have suffered losses. Key aspects include:

• Third-party funding: Were a separate entity provides funding for legal costs.
• Risk mitigation: Funding shifts the financial risk from the claimant to the funder.
• Access to justice: Provides crucial financial support, allowing claims that might not otherwise be pursued due to cost.

The PACCAR Decision: A Turning Point

The core of the PACCAR Supreme court case revolved around whether litigation funding agreements, structured to pay funders based on the damages recovered, constituted DBAs under the meaning of legislation. The Court’s 2023 ruling, by a majority, confirmed they did.

Key Aspects of the Ruling

• DBA Definition: The Court confirmed that agreements where payment to the funder is based on a percentage of the damages recovered, are classified as DBAs.
• Impact on Funding Agreements: This classification subjects funding agreements to the rules and regulations that govern DBAs.
• Broader Implications: The ruling has implications for the structure of litigation finance arrangements across various sectors, including investment claims.

Damages-Based Agreements (DBAs) and Their Role

Damages-Based Agreements (DBAs) are agreements where a lawyer’s fee is dependent on the outcome of the case, specifically a percentage of the damages recovered. The PACCAR decision broadened the scope of what constitutes a “DBA” to now include a third-party litigation funder.

The regulations surrounding DBAs are designed to protect clients and ensure fairness, including:

• Requirements for clarity and transparency in agreements
• Caps on the percentage of damages that can be claimed
• The rules are there to protect the investor in investment claims.

Implications for Investment Claims

The PACCAR ruling has altered the landscape for investment litigation in several key ways:

Impact on Funding Structures

• Restructuring Agreements: Funding agreements will likely need to be revised to comply with DBA regulations.
• Due Diligence: Greater scrutiny of the terms and conditions of funding agreements.
• Risk Assessment: an emphasis on risk assessment by both funders and claimants.

Navigating the Changes

Claimants pursuing investment claims and funders now face the implications of the PACCAR ruling.

Key Considerations

Here’s a checklist for those impacted:

1. Review Existing Agreements: Examine all existing funding agreements to ensure compliance with DBA requirements.
2. Legal Advice: Seek legal advice on restructuring agreements.
3. Transparency: Ensure a thorough understanding of the implications.

Practical Tips for Investors and Funders

Navigating the legal landscape after the PACCAR ruling requires strategic planning:

• Seek Specialist Advice: Consult with legal professionals who specialize in investment litigation funding and DBA compliance.
• Due Diligence: Perform due diligence on potential funders,evaluating their experience and regulatory compliance.
• Negotiate Terms: negotiate funding agreements carefully, ensuring that the terms are fair and transparent.

By understanding the court’s ruling and taking appropriate actions, investors and funders can effectively manage the risks and maximize their chances of accomplished investment claims.