Amicus Curiae Brief — FS Credit Opportunities Corp., et al., Petitioners v. Saba Capital Master Fund, Ltd., et al.
Supreme Court briefOct 28, 2024
Ask Donna
What actually matters in this document.
Text
No. 24-345
In the Supreme Court of the United States
FS CREDIT OPPORTUNITIES CORP., ET AL., PETITIONERS
v.
SABA CAPITAL MASTER FUND, LTD., ET AL.
ON PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
BRIEF FOR THE INVESTMENT COMPANY INSTITUTE
AND THE ASSET MANAGEMENT GROUP OF THE
SECURITIES INDUSTRY AND FINANCIAL MARKETS
ASSOCIATION AS AMICI CURIAE IN SUPPORT OF
PETITIONERS
AMY D. ROY
ROBERT A. SKINNER
ROPES & GRAY LLP
Prudential Tower
800 Boylston Street
Boston, MA 02199
PAUL G. CELLUPICA
KEVIN ERCOLINE
THE INVESTMENT
COMPANY INSTITUTE
1401 H Street, NW
Washington, DC 20005
DOUGLAS HALLWARD-DRIEMEIER
Counsel of Record
ROPES & GRAY LLP
2099 Pennsylvania Avenue, NW
Washington, DC 20006
(202) 508-4600
Douglas.Hallward-Driemeier
@ropesgray.com
LINDSEY WEBER KELJO
THE ASSET MANAGEMENT GROUP
OF THE SECURITIES INDUSTRY
AND FINANCIAL MARKETS
ASSOCIATION
1099 New York Avenue, NW
6th Floor
Washington, DC 20001
TABLE OF CONTENTS
Page
Interest of amici.................................................................. 1
Summary of the argument ................................................ 2
Argument:
I.
The ICA has provided a stable regulatory
framework enabling the growth of registered
funds, giving shareholders ready access to
market returns through low-cost diversified
professional portfolio management......................... 7
A. The ICA’s requirements for the
governance and operations of registered
funds are vigorously examined and
enforced by the SEC ...................................... 11
B. Oversight of registered funds is further
strengthened by independent fund
directors, who are recognized as having
a critical “watch dog” role under the
ICA’s governance structure ......................... 13
II. A private right of action under Section 47(b)
opens a back door for private suits over other
provisions of the ICA .............................................. 15
A. “Activist” challenges to closed-end fund
governance measures..................................... 16
B. Claims seeking “rescission” of fund
service agreements ........................................ 19
C. The resulting uncertainty over
applicable regulatory standards, coupled
with litigation expense, would be
detrimental to fund shareholders and
their savings goals .......................................... 21
(I)
II
Table of Contents—Continued
Page
Conclusion.......................................................................... 25
III
TABLE OF AUTHORITIES
Page(s)
Cases:
Alexander v. Sandoval, 532 U.S. 275 (2001)........ 4, 13
Blatt v. Merrill Lynch, Pierce, Fenner & Smith
Inc., 916 F. Supp. 1343 (D.N.J. 1996) .................. 21
Burks v. Lasker, 441 U.S. 471 (1979) .................. 13, 14
Daily Income Fund, Inc. v. Fox, 464 U.S. 523
(1984) ..................................................................... 7, 8
Eaton Vance Senior Income Tr. v. Saba Cap.
Master Fund, Ltd., No. 2084CV01533-BLS2,
2023 WL 1872102 (Mass. Super. Ct. Jan. 21,
2023)......................................................................... 17
Eaton Vance Senior Income Tr. v. Saba Cap.
Master Fund, Ltd., No. 2084CV01533-BLS2,
slip op. (Mass. Super. Ct. Oct. 21, 2024) ............. 17
Hamilton v. Allen, 396 F. Supp. 2d 545 (E.D.
Pa. 2005) ............................................................ 20, 21
Jones v. Harris Assocs. L.P., 559 U.S. 335
(2010) ................................................................... 7, 13
Kisor v. Wilkie, 588 U.S. 558 (2019).......................... 23
Mutchka v. Harris, 373 F. Supp. 2d 1021 (C.D.
Cal. 2005)................................................................. 21
Northstar Fin. Advisors Inc. v. Schwab Invs.,
779 F.3d 1036 (9th Cir. 2015)................................ 20
Oxford Univ. Bank v. Lansuppe Feeder, LLC,
933 F.3d 99 (2d Cir. 2019) ................. 4, 5, 13, 18, 24
IV
Cases—Continued:
Page(s)
Regions Morgan Keegan Secs., Derivative, &
ERISA Litig., In re, 743 F. Supp. 2d 744
(W.D. Tenn. 2010) ............................................ 20, 21
Santomenno ex rel. John Hancock Tr. v. John
Hancock Life Ins. (U.S.A.), 677 F.3d 178 (3d
Cir. 2013) ................................................................. 18
Smith v. Oppenheimer Funds Distrib., Inc., 824
F. Supp. 2d 511 (S.D.N.Y. 2011) .......................... 20
UFCW Loc. 1500 Pension Fund v. Mayer, 895
F.3d 695 (9th Cir. 2018)......................................... 12
Statutes and rules:
Investment Company Act of 1940,
15 U.S.C. 80a-1 et seq. ........2-9, 12-15, 17-20, 22-23
15 U.S.C. 80a-1(b) .................................................. 17
15 U.S.C. 80a-6(c)..................................................... 9
15 U.S.C. 80a-12(b) .................................................. 8
15 U.S.C. 80a-13(a) .................................................. 8
15 U.S.C. 80a-15(c)................................................. 14
15 U.S.C. 80a-16(b) ................................................ 14
15 U.S.C. 80a-17 ................................................... 8, 9
15 U.S.C. 80a-17(a) .................................................. 9
15 U.S.C. 80a-17(f) ................................................... 8
15 U.S.C. 80a-18(i) ....................................... 8, 17, 18
15 U.S.C. 80a-18(f) ................................................... 8
15 U.S.C. 80a-31(a) ................................................ 14
15 U.S.C. 80a-35(b) .......................................... 13, 23
15 U.S.C. 80a-41 ..................................................... 12
V
Statutes and rules—Continued:
Page(s)
15 U.S.C. 80a-46(b) ....... 2, 4-6, 13, 15, 17, 19-22, 24
Securities Act of 1933, ch. 38, Tit. I, 48 Stat. 74
(15 U.S.C. 77a et seq.) .............................................. 3
17 C.F.R.:
Section 270.0-1 ....................................................... 14
Section 270.2a-5 ..................................................... 14
Section 270.2a-7 ..................................................... 11
Section 270.6c-11 .................................................... 11
Section 270.17a-7 ..................................................... 9
Section 270.17a-8 ..................................................... 9
Section 270.38a-1(a)(2) .......................................... 14
Section 270.38a-1(a)(4) .......................................... 14
Miscellaneous:
Quinn Curtis & John Morley, An Empirical
Study of Mutual Fund Excessive Fee Litigation: Do the Merits Matter? (Sept. 18,
2012), https://law.yale.edu/sites/default
/files/area/workshop/leo/document/Morley
_MutualFundExcessiveFeeLitigtion.pdf .......... 24
H.R. 279, 76th Cong. (1939) ........................................ 17
ICI:
2024 Investment Company Fact Book (2024)
https://www.icifactbook.org/ ............................ 2, 11
Characteristics of Mutual Fund Investors,
2023, 29(11) ICI Rsch. Perspective (Oct.
2023), https://www.ici.org/system/files/202310/per29-11.pdf ....................................................... 11
VI
Miscellaneous—Continued:
Page
The Closed-End Fund Market, 2023, 30(5)
ICI Rsch. Perspecive (May 2024), https://
www.ici.org/system/files/2024-05/per3005.pdf ....................................................................... 19
Recommendations Regarding the
Availability of Closed-End Fund Takeover
Defenses (2020), https://www.ici.org/docserver/pdf%3A20_ltr_cef.pdf ......................... 16, 19
Trends in the Expenses and Fees of Funds,
2023, 30(2) ICI Rsch. Perspective (Mar.
2023), https://www.ici.org/system/files/202403/per30-02.pdf ....................................................... 11
ICI Mutual, Claims Trends: A Review of
Claims Activity in the Mutual Fund
Industry (Apr. 2024), https://www.
icimutual.com/sites/default/files/Claims
%20Trends%202023-2024.pdf............................... 23
IDC & ICI, Overview of Fund Governance
Practices, 1994-2022 (2023), https://www.ici.
org/system/files/2023-10/23-fundgovernance-practices.pdf ..................................... 14
Press Release, SEC, SEC Announces
Enforcement Results for Fiscal year 2023,
https://www.sec.gov/newsroompressreleases/2023-234 ................................................... 12
SEC:
Fiscal Year 2025 Examination Priorities,
https://www.sec.gov/files/2025-exam-priori
ties.pdf ..................................................................... 12
VII
Miscellaneous—Continued:
Page
No Action Letters, https://www.investor.
gov/introduction-investing/investing-basics/
glossary/no-action-letters (last visited Oct.
28, 2024)................................................................... 10
Staff Statement and Boulder No-Action
Letter, https://www.sec.gov/investment ........... 18
In the Supreme Court of the United States
NO. 24-345
FS CREDIT OPPORTUNITIES CORP., ET AL., PETITIONERS
v.
SABA CAPITAL MASTER FUND, LTD., ET AL.
ON PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
BRIEF FOR THE INVESTMENT COMPANY
INSTITUTE AND THE ASSET MANAGEMENT
GROUP OF THE SECURITIES INDUSTRY AND
FINANCIAL MARKETS ASSOCIATION AS
AMICI CURIAE IN SUPPORT OF
PETITIONERS
INTEREST OF AMICI *
The Investment Company Institute (ICI) is the
leading association representing regulated funds globally, including mutual funds, exchange-traded funds
(ETFs), closed-end funds, and unit investment trusts in
the United States. ICI seeks to strengthen the foundation of the asset management industry for the ultimate
All parties have been informed of the filing of this amici curiae
brief. No counsel for any party authored this brief in whole or in
part, and no person or entity, other than amici curiae or their counsel made a monetary contribution intended to fund the preparation
or submission of this brief.
*
(1)
2
benefit of the long-term individual investor. ICI’s members manage $37.1 trillion invested in funds registered
under the Investment Company Act of 1940 (ICA), serving over 100 million United States investors, and they
manage an additional $8.7 trillion in regulated fund assets outside the United States.
ICI works to protect and advance the interests of
fund shareholders through advocacy directed at ensuring a sound legal and regulatory framework. ICI’s extensive research enhances its advocacy, and its regular
research reports include, for example, an annual empirical review of trends and activities in the fund industry.
See ICI, 2024 Investment Company Fact Book (2024)
https://www.icifactbook.org/.
The Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA
AMG) represents a wide range of asset management
firms, providing views on U.S. and global policy and creating industry best practices. SIFMA AMG’s members
represent U.S. and global asset management firms—
both independent and broker-dealer affiliated—that
manage more than 50% of global assets under management. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments,
public and private pension funds, and private funds.
ICI and SIFMA AMG submit this brief as amici curiae to urge the Court to grant the Petition.
SUMMARY OF THE ARGUMENT
The availability of a private right of action under
Section 47(b) of the ICA, 15 U.S.C. 80a-46(b), risks upending the long-established regulatory structure
3
governing the registered fund industry, causing significant regulatory uncertainty and wasteful litigation.
Registered funds governed by the ICA—including mutual funds, ETFs, and closed-end funds—are a critical
means for tens of millions of U.S. households to meet
their financial and retirement savings goals. The regulatory and governance structure created by the ICA is
the bedrock of this key sector of the U.S. economy, fostering dramatic growth and innovation of investment
products that provide retail investors with low-cost access to market returns through diversified professional
portfolio management.
Registered funds are among the most highly regulated financial products in the market. The ICA and
rules promulgated thereunder by the SEC set forth detailed requirements for a fund’s governance, capital
structure, and daily operations. 1 The cornerstone of
fund governance is oversight by independent directors
who are unaffiliated with the fund’s investment adviser.
Directors are assigned both plenary supervisory authority and many specific oversight responsibilities—including approving and monitoring the service agreements
between funds and their investment advisers (and other
services providers). Because fund management and operations are nearly always fully externalized, these service agreements cover essentially every action required
to create and operate a fund. The ICA further imposes
specific substantive requirements on the operations and
management of funds, including limits on the use of
1
In addition to the ICA, registered funds are also subject to many
other provisions of the securities laws, including the extensive registration and disclosure requirements under the Securities Act of
1933.
4
leverage; strict custody of fund assets separate from the
adviser’s assets; and prohibitions on transactions with
affiliates—all designed to protect fund shareholders.
Congress granted sole regulatory authority to enforce the ICA to the SEC, which devotes significant resources to the regular examination of registered funds
and their advisers to assess compliance, as well as the
investigation of potential violations by the SEC’s Division of Enforcement. At the same time, the ICA also
grants the SEC authority to define exemptions to the
statute’s requirements, which has resulted in a series of
crucial exemptive rules and orders allowing innovative
fund products and practices that would otherwise be
prohibited by the statute, including such widely utilized
products as ETFs and money market funds. In addition
to its formal exemptive authority, the SEC and its staff
frequently issue informal interpretative guidance to the
industry (including via “no-action” letters) regarding
compliance with the ICA’s provisions. Unsurprisingly,
given the central role of the SEC in this framework, the
ICA contains only a single express private right of action
under Section 36(b), which provides a shareholder claim
for excessive fees paid from a fund to its investment adviser. Following Alexander v. Sandoval, 532 U.S. 275
(2001), courts have consistently declined to read implied
private rights of action into the ICA, including under
Section 47(b)—until the Second Circuit’s decision in Oxford University Bank v. Lansuppe Feeder, LLC, 933
F.3d 99 (2019), which created the circuit split addressed
in the Petition.
The question posed by the Petition is of vital importance to the millions of households that depend on
registered funds to meet their financial goals, as the
5
availability of a private right of action under Section
47(b) of the ICA threatens to disrupt the stable and welldeveloped regulatory framework relied upon by funds
and their boards and advisers in serving U.S. retail investors. Authorizing fund shareholders—whose interests may diverge from one another—to sue for “rescission” of a contract “whose performance involves * * * a
violation of” the ICA would open a back door for private
suits alleging violations of the statute’s many other substantive provisions, whose enforcement is the sole province of the SEC. See, e.g., Oxford Univ. Bank, 933 F.3d
at 107. Virtually any alleged misstep under the ICA
might be construed by plaintiffs as being part of the
“performance” of a contract, thus giving rise to an ostensible action for rescission of the entire contract. Handing such a skeleton key to shareholders would in effect
invite them to assume the role of private attorneys general to enforce the substantive provisions of the ICA
alongside the SEC and to second-guess the judgments of
the independent directors Congress identified as protectors of shareholder interests. There is no statutory basis
to believe Congress intended this result.
One example of this back door scenario is presented
by the current litigation. Because the by-laws and other
governing documents of a fund are treated by many
states’ laws as “contracts” between the fund and its
shareholders, so-called “activist” investors like respondents Saba Capital Master Fund, Ltd. and Saba Capital
Management, L.P. (together, Saba) have in numerous
cases since the Second Circuit’s decision in Oxford University Bank seized upon Section 47(b) as an entry point
to challenge closed-end fund by-laws as violating other
provisions of the ICA regarding fund capital structure
and board elections. Saba’s transparent agenda in
6
asserting these claims is to further its closed-end fund
“arbitrage strategy,” seeking to dismantle funds to obtain short-term profits at the expense of other shareholders—often retirees with long-term investment goals
who desire a steady income stream and are less concerned about short-term price swings. Tellingly, the
SEC has not taken any enforcement action to challenge
the by-laws in question as violating the ICA.
But the back door threat posed by a Section 47(b)
private right of action extends well beyond the closedend fund “activist” context. Given the fully externalized
management of nearly all registered funds, virtually
every task involved in managing a fund and distributing
its shares is undertaken by the investment adviser or
other service providers pursuant to a written agreement
with the fund in exchange for a fee. If fund shareholders
can assert derivative or direct claims for “rescission” of
such service agreements—and disgorgement of the
fees—based on alleged violations of other ICA provisions in the “performance” of the contracts (regardless
of whether the SEC considers the statute to have been
violated), the potential claims contrived by the private
plaintiffs’ bar are almost limitless in scope. And given
the large dollar amounts at stake in many fund agreements, the incentive to assert such claims would be substantial. The extensive history of private litigation involving the registered fund industry bears this out.
Funds and their advisers and boards have been targeted
for decades by class action plaintiffs’ lawyers, motivated
by the desire to score a large attorney fee from perceived “deep pocket” defendants. Recognizing a Section
47(b) private right of action could be tantamount to declaring open season on the SEC’s interpretation of the
ICA’s substantive provisions (and funds’ reliance on it),
7
leading the plaintiffs’ bar to press its own interpretations in pursuit of a payday. A flood of new litigation
could risk contradictory interpretations and regulatory
uncertainty, and would certainly impose massive litigation costs and distraction, all to the ultimate detriment
of registered fund shareholders.
The Petition should be granted and the Second Circuit’s decision reversed.
ARGUMENT
I.
THE ICA HAS PROVIDED A STABLE REGULATORY
FRAMEWORK ENABLING THE GROWTH OF REGISTERED FUNDS, GIVING SHAREHOLDERS READY
ACCESS TO MARKET RETURNS THROUGH LOWCOST DIVERSIFIED PROFESSIONAL PORTFOLIO
MANAGEMENT
“Congress adopted the [ICA] because of its concern
with ‘the potential for abuse inherent in the structure of
investment companies.’ Unlike most corporations, an investment company is typically created and managed by
a preexisting external organization known as an investment adviser.” Daily Income Fund, Inc. v. Fox, 464
U.S. 523, 536 (1984) (quoting Burks v. Lasker, 441 U.S.
471, 480 (1979)). “Recognizing that the relationship between a fund and its investment adviser was ‘fraught
with potential conflicts of interest,’ the [ICA] created
protections for mutual fund shareholders.” Jones v.
Harris Assocs. L.P., 559 U.S. 335, 339 (2010) (quoting
Daily Income Fund, 464 U.S. at 536-538, Burks, 441 U.S.
at 481-482).
In order to minimize such conflicts of interests,
Congress established a scheme that regulates most
transactions between investment companies and
8
their advisers, 15 U.S.C. § 80a-17; limits the number of persons affiliated with the adviser who may
serve on the fund’s board of directors, § 80a-10; and
requires that fees for investment advice * * * be
governed by a written contract approved by both
the directors and the shareholders of the fund,
§ 80a-15.
Daily Income Fund, 464 U.S. at 536-537.
The ICA provides additional shareholder protections through specific substantive requirements touching virtually every aspect of the structure, governance,
and operations of registered funds, including for example: imposing limits on the use of leverage in portfolio
management, 15 U.S.C. 80a-18(f); mandating strict custody of fund assets separate from the adviser’s assets, 15
U.S.C. 80a-17(f); barring capital structures that concentrate voting power in the hands of selected shareholders,
15 U.S.C. 80a-18(i); requiring shareholder approval of
changes to a fund’s fundamental investment policies, 15
U.S.C. 80a-13(a); limiting the use of fund assets for purposes of marketing the fund’s shares to new investors
and thereby increasing the adviser’s revenues, 15 U.S.C.
80a-12(b); and prohibiting certain transactions between
registered funds and their affiliates, 15 U.S.C. 80a-17.
At the same time, Congress also recognized that the
ICA’s broad requirements and prohibitions might be unnecessarily rigid in certain situations, potentially stifling
shareholder-friendly innovation consistent with the
statute’s policy goals. Congress thus gave the SEC
broad authority to grant exemptions to the statutory
provisions “if and to the extent that such exemption is
necessary or appropriate in the public interest and consistent with the protection of investors and the purposes
9
fairly intended by the policy and provisions of [the
ICA].” 15 U.S.C. 80a-6(c). The SEC has exercised this
authority to adopt various exemptive rules authorizing
transactions and structures that would otherwise be
prohibited by the ICA upon the satisfaction of specified
conditions—which often include a determination by a
fund’s board that the action is in the shareholders’ best
interests. For example, Section 17(a) of the ICA generally prohibits transactions between a registered fund
and its affiliated persons (e.g., the adviser) to protect
funds and their shareholders from potential self-dealing
and overreaching by affiliated persons or entities. 15
U.S.C. 80a-17. However, recognizing that certain transactions with an affiliate may in fact benefit fund shareholders in some circumstances, the SEC has granted express authority to engage in such transactions when certain protective conditions are met (e.g., securities are
bought and sold at “current market price”). See 17
C.F.R. 270.17a-7. Similarly, whereas a merger of a fund
into an affiliated fund would otherwise be barred by Section 17(a), the SEC has authorized such mergers conditioned on a board finding that the merger is in the best
interests of the fund and will not dilute the interests of
the merging fund’s holders. 17 C.F.R. 270.17a-8.
The SEC also exercises its authority to grant exemptive orders upon the application of a given fund
and/or adviser, based upon the applicant’s representations in its request and frequently upon conditions set
forth in the application or order. Orders are compiled
and published on the SEC’s website and provide market
participants with clarity about the SEC’s policy views.
In addition to formal exemptive relief, the SEC staff
also provides “no action” guidance where an individual
10
or entity “is not certain whether a particular product,
service or action would constitute a violation of the securities laws.” SEC, No Action Letters, https://www.investor.gov/introduction-investing/investing-basics/glossary/no-action-letters. If the staff grants the request for
relief, it provides a letter concluding “that the SEC staff
would not recommend that the Commission take enforcement action against the requester based on the
facts and representations described in the individual’s or
entity’s request.” Ibid. The SEC publishes a compilation of the no-action letters on its website and explains:
“In some cases, the SEC staff may permit parties other
than the requestor to rely on the no-action relief to the
extent that the third party’s facts and circumstances are
substantially similar to those described in the underlying request.” Ibid. Industry participants frequently
rely on no-action letters issued to others as indicative of
what conduct will not result in enforcement proceedings.
The explosive growth of the registered fund industry since 1940 is testament to the effectiveness of the
ICA’s balanced regulatory framework in cultivating investor confidence through shareholder protections,
while also allowing sufficient flexibility for innovation to
respond to investors’ evolving goals. Prime examples of
consequential investment innovations that emerged under the SEC’s broad powers without the need for legislative amendments to the ICA are the development of
money market funds beginning in the 1970s and ETFs in
the 1990s. Neither of these products would be legal under a facial reading of the ICA’s provisions, and both owe
their existence to the SEC’s discretionary exercise of its
exemptive authority. In each instance, the SEC initially
issued a series of exemptive orders allowing individual
firms to engage in otherwise-violative conduct
11
necessary to launch and operate the products, which orders were ultimately replaced by a comprehensive rule
setting forth the protective conditions to qualify for the
exemption. 17 C.F.R. 270.2a-7 (money market funds), 17
C.F.R. 270.6c-11 (exchange-traded funds).
The success of the ICA’s flexible regulatory structure in fostering the registered funds marketplace is
manifest. At year-end 2023, there was over $33 trillion
invested in US registered funds, held by 71.5 million
households (or 54.4% of all US households) and 120.8 million individuals. ICI, 2024 Investment Company Fact
Book, supra. In 2023, two-thirds of mutual fund-owning
households had more than half of their household financial assets invested in mutual funds. ICI, Characteristics of Mutual Fund Investors, 2023, 29(11) ICI Rsch.
Perspective (Oct. 2023), https://www.ici.org/system/
files/2023-10/per29-11.pdf. What’s more, the cost of investing in registered funds has consistently declined
over the course of decades. See ICI, Trends in the Expenses and Fees of Funds, 2023, 30(2) ICI Rsch. Perspective 1 (Mar. 2023), https://www.ici.org/system/
files/2024-03/per30-02.pdf (“From 1996 to 2023, average
equity mutual fund expense ratios dropped by 60 percent and average bond mutual fund expense ratios
dropped by 56 percent.”).
A. The ICA’s requirements for the governance
and operations of registered funds are vigorously examined and enforced by the SEC
In addition to the SEC’s exemptive authority, both
registered funds and their advisers are subject to regular examination by the staff of the SEC’s Division of Examinations. This Division publishes an annual list of its
examination priorities, including those provisions of the
12
ICA of particular focus. The most recent edition explained, “[t]he Division continues to prioritize examinations of registered investment companies (RICs or
funds), including mutual funds and [ETFs], due to their
importance to retail investors, particularly those saving
for retirement.” SEC, Fiscal Year 2025 Examination
Priorities 7, https://www.sec.gov/files/2025-exam-priori
ties.pdf. Examiners regularly issue “deficiency” letters
to funds and/or their advisers, reflecting the staff’s finding that provisions of the ICA have not been fully complied with. The staff typically identifies what steps it expects to be taken to address any deficiencies—steps that
do not typically include rescission of service agreements.
Moreover, the Examinations staff can and frequently does refer matters to the Division of Enforcement for further investigation and potential formal
claims. Section 42 of the ICA empowers the agency to
enforce all the provisions of the statute by granting it
broad authority to investigate suspected violations and
initiate actions in federal court for injunctive relief and
civil penalties. See 15 U.S.C. 80a-41; UFCW Loc. 1500
Pension Fund v. Mayer, 895 F.3d 695, 701 (9th Cir.
2018). The SEC’s Enforcement staff deploys significant
resources in fulfilling this responsibility, with an extremely active emphasis on investigation of potential violations of the ICA by funds and advisers. See Press Release, SEC, SEC Announces Enforcement Results for
Fiscal year 2023, https://www.sec.gov/newsroom /pressreleases/2023-234 (reflecting 139 enforcement actions
against investment advisers and/or investment companies during FY23).
Given that Congress delegated comprehensive examination and enforcement authority over the ICA to
13
the SEC—paired with the power to exercise its judgment to grant exemptions and guidance regarding the
statute’s many technical provisions—it is hardly a surprise that Congress did not also see fit to deputize shareholders to pursue their own potentially disparate enforcement agendas of the statute’s provisions. Congress
has adopted only a single express private right of action
under Section 36(b), added by amendment in 1970,
providing a shareholder claim for allegedly excessive
fees. Since Alexander v. Sandoval, 532 U.S. 275 (2001),
courts have consistently declined to read implied private
rights of action into the ICA, including under Section
47(b)—until the Second Circuit’s decision in Oxford University Bank in 2019, which created the circuit split addressed in the Petition.
B. Oversight of registered funds is further
strengthened by independent fund directors,
who are recognized as having a critical “watch
dog” role under the ICA’s governance structure
As a further check, the ICA “interposes disinterested directors as ‘independent watchdogs’ of the relationship between a mutual fund and its adviser.” Jones,
559 U.S. at 348 (quoting Burks, 441 U.S. at 484). “The
cornerstone of the ICA’s effort to control conflicts of interest within mutual funds is the requirement that at
least 40% of a fund’s board be composed of independent
outside directors. 15 U.S.C. § 80a-10(a).” Burks v. Lasker, 441 U.S. 471, 482 (1979) (footnote omitted). The minimum number of independent directors is for practical
purposes 50%, because a majority is required for funds
to qualify for the SEC exemptive rules discussed above.
17 C.F.R. 270.0-1.
And in practice, independent
14
directors typically comprise more than 75% of today’s
fund boards. IDC & ICI, Overview of Fund Governance
Practices, 1994-2022 (2023), https://www.ici.org/system
/files/2023-10/23-fund-governance-practices.pdf (finding
89% of fund boards are comprised of 75% or more independent directors).
Like directors of operating companies, independent
fund directors have a general fiduciary duty to represent
the interests of the funds. But they also have specific
statutory and regulatory responsibilities under the ICA
beyond the duties required of other types of directors.
“To these statutorily disinterested directors, the [ICA]
assigns a host of special responsibilities involving supervision of management and financial auditing.” Burks,
441 U.S. at 482-483. For example, they have the statutory duty to review and approve the contracts of the investment adviser and the principal underwriter, 15
U.S.C. 80a-15(c), to appoint other disinterested directors
to fill board vacancies, 15 U.S.C. 80a-16(b), and to select
the independent public accountants who certify the
fund’s financial statements, 15 U.S.C. 80a-31(a). SEC
rules promulgated pursuant to the ICA likewise require
fund board action with respect to various matters, including annual review and approval of the fund’s compliance policies and procedures as reasonably designed to
prevent violations of the securities laws, 17 C.F.R.
270.38a-1(a)(2); approval of the appointment, compensation and removal of the fund’s chief compliance officer,
17 C.F.R. 270.38a-1(a)(4); and valuation oversight, 17
C.F.R. 270.2a-5, among others.
15
II. A PRIVATE RIGHT OF ACTION UNDER SECTION
47(B) OPENS A BACK DOOR FOR PRIVATE SUITS
OVER OTHER PROVISIONS OF THE ICA
The question posed by the Petition is of vital importance to the registered fund industry, as the availability of a private right of action under Section 47(b)
threatens to disrupt the established regulatory framework that guides the daily actions of funds and their
boards and advisers. This framework depends on a series of contracts consistent with the requirements of the
ICA, and frequently also exemptive rules and orders
thereunder, which are subject to approval by independent directors and review by SEC staff.
Allowing shareholders a claim for “rescission” of
contracts whose “performance” the shareholder believes
involve a “violation” of the ICA opens a back door to private suits over essentially every other provision of the
ICA. Such suits would inevitably involve plaintiffs second-guessing the interlocking judgments of both the
SEC and independent directors often required in approval of many common investment actions—for example, the SEC’s crafting of an exemptive rule or order, the
SEC’s guidance for compliance with that rule or order,
and the independent directors’ approval of the action as
complying with the SEC requirements. This litigation
back door would promote significant regulatory uncertainty, as well as wasteful litigation expense. This uncertainty could discourage fund sponsors from creating
new funds, thereby potentially reducing the types of investments available to prospective investors.
16
A. “Activist” challenges to closed-end fund governance measures
One example of such back door litigation is presented by the current litigation involving “activist”
hedge fund investor Saba. Saba engages in what it calls
a closed-end fund “arbitrage strategy,” acquiring large
numbers of shares of closed-end funds and frequently using its concentrated voting power to force transformational changes in the fund—which in turn provide Saba
the ability to sell its shares at above-market prices,
yielding short-term arbitrage profits. These actions
usually include disruptive changes, such as large tender
offers (prompting significant asset liquidation), merger
of a fund, or outright liquidation, that harm ordinary
long-term shareholders. ICI, Recommendations Regarding the Availability of Closed-End Fund Takeover
Defenses 5-6 (2020), https://www.ici.org/doc-server/pdf
%3A20_ltr_cef.pdf (ICI March 2020 Report). Because
these changes benefiting Saba come at the expense of
ordinary shareholders in the funds, who typically seek
long-term income streams from their investments,
closed-end fund boards have adopted various measures
seeking to ensure that such transformative and potentially harmful fund changes only occur if they have the
support of a large portion of all fund shareholders—not
just concentrated minority holders. Id. at 11-16. At
least one court has recognized the legitimate interest of
fund boards in considering such measures to protect
long-term shareholders from the potential harm caused
by the “activist” arbitrage strategy. 2 Among the
In granting partial summary judgment against Saba in connection
with its claim for breach of fiduciary duty against certain Eaton
Vance closed-end funds and their independent trustees, a
2
17
identified abuses Congress sought to address expressly
in the ICA were harms caused by concentrated minority
holders acting in ways that hurt ordinary shareholders
with different interests. H.R. 279, 76th Cong. (1939); 15
U.S.C. 80a-1(b).
Saba has seized on the fact that the by-laws and
other governing documents of a fund are treated by
many states’ laws as contracts between the fund and its
shareholders, and it has been invoking Section 47(b) to
seek “rescission” of board actions adopting defensive
measures that might hamper its arbitrage strategy. The
underlying basis for these rescission claims is alleged violations of other provisions of the ICA that are otherwise within the enforcement authority of the SEC. In
the present case, the provision at issue is Section 18(i),
part of the “Capital Structure” section of the statute,
Massachusetts Superior Court found that the “Trustees had a legitimate business reason for their action * * * that the purpose of the
Bylaw Amendments was to protect Funds’ retail shareholders from
the harm they perceived that activist hedge funds like Saba could
cause if they gained a concentrated minority of shares, forced shortterm liquidity events, and thereby threatened retail investors’ interest in the Funds and the Funds’ viability” as long-term investment vehicles. Eaton Vance Senior Income Tr. v. Saba Cap. Master
Fund, Ltd., No. 2084CV01533-BLS2, 2023 WL 1872102, at *11
(Mass. Super. Ct. Jan. 21, 2023). In its trial ruling rejecting Saba’s
challenge to a majority-of-outstanding-shares voting standard, the
court found that “Saba’s activist objectives are generally inconsistent with the Funds’ investment objectives. The goal of monetizing the discount to [net asset value] differs from the goal of managing a stable pool of assets for a steady income stream over a long
period of time.” Findings of Fact, Conclusions of Law, and Order
for Judgment, Eaton Vance Senior Income Tr. v. Saba Cap. Master
Fund, Ltd., No. 2084CV01533-BLS2, slip op. at 13 (Mass. Super. Ct.
Oct. 21, 2024).
18
requiring that all fund shares issued be voting securities
that have “equal voting rights” with all other shares. In
its most recent guidance on this question, the SEC staff
issued a statement in May 2020 that it would not recommend enforcement action for violation of Section 18(i) in
the event a fund opted into the Maryland Control Share
Acquisition Act. See SEC, Staff Statement and Boulder
No-Action Letter at *2, https://www.sec.gov/investment
/control-share-acquisition-statutes (recognizing, both
expressly and implicitly, the legitimacy of actions taken
by boards of closed-end funds to respond to activist investors). Nevertheless, Saba brought the present lawsuit 3 to challenge the actions of multiple fund boards as
violating Section 18(i), alleging that the SEC staff’s
views on the provision were of no relevance for the court
in adjudicating Saba’s claims.
In separate litigations, Saba challenges other types
of closed-end fund board actions, including the adoption
of a voting standard requiring the support of a majority
of outstanding shares to elect trustees and the implementation of a shareholder rights plan (often referred to
as a “poison pill”). Here again, the SEC has not taken
any enforcement action or suggested in guidance that
such measures violate the ICA provisions that Saba
Despite the fact that all of the funds at issue were organized under
Maryland law, Saba asserted the actions within the Second Circuit,
transparently to take advantage of the circuit split created by Oxford University Bank. The Third Circuit has ruled to the contrary.
Santomenno ex rel. John Hancock Tr. v. John Hancock Life Ins.
(U.S.A.), 677 F.3d 178 (2013). Several of the funds were dismissed
by the district court based on by-laws requiring them to be sued in
Maryland.
3
19
invokes via the Section 47(b) back door opened by the
Second Circuit.
The uncertainty created by the repeated attacks of
Saba and other “activists” against multiple closed-end
funds is having a demonstrated negative effect on the
availability of closed-end funds to investors in the market. ICI data show that, as the number of funds targeted
by “activists” has continued to grow, the number of
closed-end funds available to investors in the market has
contracted significantly. ICI, The Closed-End Fund
Market, 2023, 30(5) ICI Rsch. Perspecive (May 2024),
https://www.ici.org/system/files/2024-05/per30-05.pdf;
ICI March 2020 Report at 14, App. A.
B. Claims seeking “rescission” of fund service
agreements
The back door litigation threat posed by a Section
47(b) private right of action reaches well beyond the
closed-end fund activist context. Under the prevalent
externalized management model, virtually every task
required to operate a registered fund and offer it to investors is undertaken by a service provider pursuant to
a written agreement with the fund in exchange for a fee.
In a typical structure, the adviser manages the fund’s
portfolio in accordance with its investment strategy, engages with third-party brokers who execute portfolio
transactions, facilitates the creation of required fund disclosures, and coordinates the efforts of the other service
providers. Separately, the underwriter markets and distributes the fund’s shares in a broker-dealer capacity;
the custodian bank maintains custody of the fund’s portfolio holdings; the transfer agent conducts the execution
and recordkeeping of transactions in the fund’s shares;
the administrator prepares the fund’s financial
20
statements and other detailed SEC filings and calculates
the fund’s daily net asset value; and a public auditing
firm audits the firm’s financial statements for inclusion
in the annual shareholder report.
If fund shareholders can assert claims for “rescission” of such service agreements premised on alleged violations of other ICA provisions in the “performance” of
the contracts—with the bounty being disgorgement of
the fees paid thereunder—the potential claims that
could be contrived by the private plaintiffs’ bar are almost limitless in scope. Procedurally, these claims
would most plausibly be asserted as derivative claims on
behalf of the fund as party to the agreement in question.
See, e.g., In re Regions Morgan Keegan Secs., Derivative, & ERISA Litig., 743 F. Supp. 2d 744, 761 (W.D.
Tenn. 2010); Hamilton v. Allen, 396 F. Supp. 2d 545, 558
(E.D. Pa. 2005). There is also some precedent for fund
shareholders bringing direct claims as third-party beneficiaries of agreements between funds and service providers. See Northstar Fin. Advisors Inc. v. Schwab
Invs., 779 F.3d 1036, 1065 (9th Cir. 2015) (holding that
fund shareholders could assert a direct claim under state
law for breach of the investment advisory agreement between a mutual fund and its adviser as third-party beneficiaries of that contract).
Prior attempts to invoke Section 47(b) in connection
with alleged violations of other ICA provisions (albeit
unsuccessfully) serve to illustrate the range of such
other provisions that might be targeted by back door
claims if the door were opened—even though courts
have repeatedly held there is no private right of action
as to the targeted provisions themselves. See, e.g.,
Smith v. Oppenheimer Funds Distrib., Inc., 824 F. Supp.
21
2d 511, 522-523 (S.D.N.Y. 2011) (Sections 36(a), 38(a)); In
re Regions Morgan Keegan Secs., Derivative, & ERISA
Litig., 743 F. Supp. 2d at 761-762 (Sections 13, 22, 30,
34(b)); Hamilton, 396 F. Supp. 2d at 553-555 (Section
36(a)); Mutchka v. Harris, 373 F. Supp. 2d 1021, 10251026 (C.D. Cal. 2005) (Section 36(a)); Blatt v. Merrill
Lynch, Pierce, Fenner & Smith Inc., 916 F. Supp. 1343,
1357-1358 (D.N.J. 1996) (Section 13(a)(3)).
C. The resulting uncertainty over applicable regulatory standards, coupled with litigation expense, would be detrimental to fund shareholders and their savings goals
Whether back door claims are asserted by self-interested concentrated holders like Saba or by the traditional class action plaintiffs’ bar, an implied Section 47(b)
private right of action could result in significant regulatory uncertainty and litigation expense for the fund industry to the detriment of shareholders. Recognizing a
Section 47(b) private right of action could be tantamount
to declaring open season on the SEC’s multi-layered interpretation and application of the ICA’s substantive
provisions, as reflected in the agency’s exemptive rules,
orders, published guidance, and enforcement actions.
Although Congress gave no indication whatsoever of an
intent to deputize shareholders to enforce the ICA’s provisions in parallel with (or in tension with) the SEC, that
could be the practical effect of a Section 47(b) back door.
Recognizing a private right of action under Section 47(b)
effectively converts a provision meant as a shield for
22
defendants in breach of contract actions into a sword for
the plaintiffs’ bar. 4
The risk of regulatory uncertainty is made more
acute by questions surrounding whether courts would be
bound by the SEC’s interpretations in private litigation
pressing for alternative readings of the ICA. The industry has long relied on the interpretations of the ICA’s
provisions provided by the SEC and its staff in understanding what structures and practices are deemed appropriate under the statute by its primary enforcer. These interpretations are reflected in rules, orders, no-action letters, and enforcement actions, as well
as via informal consultation and comments made by the
staff on new fund registration statements before shares
are offered to the public. A clear understanding of what
activities will and will not trigger an SEC enforcement
action has long been a polestar for industry actors in
managing funds and investing in new business lines and
products. Opening up this body of guidance to secondguessing by private plaintiffs in litigation would dramatically undermine the ability of industry actors to rely on
what have heretofore been considered established guiding principles. This is especially so if courts hearing
these challenges consider themselves unbound by the
SEC’s long-stated views. Private litigants can be expected to argue that the agency’s interpretation of the
Rejection of a Section 47(b) private rescission claim does not leave
shareholders without redress where fund service providers allegedly fall short. Shareholders can assert derivative claims for damages to a fund under common law theories such as breach of contract
or fiduciary duty, as well as direct claims under the federal securities laws in connection with alleged materially misleading statements in a fund’s registration statement.
4
23
statute—and even its own rules thereunder—are not
binding on a court, and in many cases will not be entitled
to deference. See Kisor v. Wilkie, 588 U.S. 558 (2019).
Product innovations that have been enabled directly by
the industry’s ability to rely upon the SEC’s reasoned
judgments about exemptions from the ICA’s prohibitions have furthered the savings goals of millions of
American households. Regulatory uncertainty from a
litigation-driven reopening of those judgments could seriously hamper product innovation that directly serves
U.S. savers.
Moreover, as demonstrated by the long history of
private litigation involving funds, such claims are typically motivated by self-interested agendas like Saba’s
and/or by hopes of a large attorney fee—not to enhance
shareholder protection. Funds and their advisers and
boards have been targeted for decades by class actions
plaintiffs’ lawyers, motivated by the desire to score a
large attorney fee from perceived “deep pocket” defendants. The sole express private right of action under the
ICA—for “excessive fee” claims under Section 36(b)—
spawned a wave of cases, typically asserted against
large funds that charged modest fees, in hopes of a proportionately large attorney fee recovery. Not a single
plaintiff has ever prevailed in these cases, despite imposing hundreds of millions of dollars of legal expenses on
the industry to defend against these claims. See ICI Mutual, Claims Trends: A Review of Claims Activity in the
Mutual Fund Industry at 4 (Apr. 2024), https://www.
icimutual.com/sites/default/files/Claims%20Trends%20
2023-2024.pdf. 5
Empirical analysis confirms the experience lived by the industry
participants defending against this wave of cases: plaintiffs’ counsel
5
24
The circuit split created by the Second Circuit in Oxford University Bank (2019) has itself spawned uncertainty and wasteful incentives—including forum shopping by plaintiffs seeking to take advantage of the Section 47(b) claim within the Second Circuit. Even in the
present litigation, plaintiffs below asserted claims in the
SDNY against multiple funds with express forum selection clauses outside of New York—resulting in the
funds’ dismissal.
did not select funds for litigation based on high fees, but instead
based on large asset bases that would generate a higher attorney
fee in the event of a successful case. See Quinn Curtis & John Morley, An Empirical Study of Mutual Fund Excessive Fee Litigation:
Do the Merits Matter? (Sept. 18, 2012), https://law.yale.edu/sites/
default/files/area/workshop/leo/document/Morley_MutualFundExc
essiveFeeLitigation.pdf.
25
CONCLUSION
For the foregoing reasons, the Petition should be
granted and the judgment of the Court of Appeals should
be reversed.
Respectfully submitted.
DOUGLAS HALLWARD-DRIEMEIER
AMY D. ROY
ROBERT A. SKINNER
ROPES & GRAY LLP
PAUL G. CELLUPICA
KEVIN ERCOLINE
THE INVESTMENT COMPANY
INSTITUTE
LINDSEY WEBER KELJO
THE ASSET MANAGEMENT GROUP OF
THE SECURITIES INDUSTRY AND
FINANCIAL MARKETS ASSOCIATION
OCTOBER 2024
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.