Nexpoint Diversified Real Estate Trust, Plaintiff-Appellant* v. Acis Capital Management, L.P., Joshua N. Terry, Brigade Capital Management, LP, Defendants-Appellees, Highland Clo Funding, Ltd., Intervenor-Defendant-Appellee, and U.S. Bank, N.A., Defendant Appeal from the United States District Court for the Southern District of New York No. 21CV04384, Gregory H. Woods, Judge. Plaintiff-appellant NexPoint Diversified Real Estate Trust (“NexPoint”), a noteholder in a collateralized loan obligation, appeals from the dismissal by the District Court (Gregory H. Woods, J.) of its claim under §215(b) of the Investment Advisers Act of 1940 (“IAA”), 15 U.S.C. §80b-15(b). Section 215(b) provides a cause of action for rescission of contracts (1) that were made in violation of the IAA or (2) the performance of which involves the violation of the IAA. We hold that, under §215(b), a contract’s performance involves the violation of the IAA only if performing a contractual duty requires conduct prohibited by the IAA. No such unlawful conduct is required by the contracts NexPoint seeks to rescind, and therefore we AFFIRM the judgment of the District Court. AFFIRMED. SARAH MERRIAM, C.J. Plaintiff-appellant NexPoint Diversified Real Estate Trust (“NexPoint”), a noteholder in a collateralized loan obligation (“CLO”), appeals from the dismissal by the District Court (Gregory H. Woods, J.) of its claim under §215(b) of the Investment Advisers Act of 1940 (“IAA”), 15 U.S.C. §80b-15(b). Section 215(b) provides a cause of action for rescission of contracts (1) that were made in violation of the IAA or (2) the performance of which involves the violation of the IAA. We hold that, under §215(b), a contract’s performance involves the violation of the IAA only if performing a contractual duty requires conduct prohibited by the IAA. No such unlawful conduct is required by the contracts NexPoint seeks to rescind, and therefore we AFFIRM the judgment of the District Court. I. BACKGROUND1 NexPoint holds $7.5 million in subordinated notes issued by Acis CLO-2015-6 Ltd. (the “Issuer”), as part of a CLO. A CLO is a structured financial transaction in which a special purpose vehicle issues notes to fund the purchase of debt instruments, which are then pooled and conveyed to a trust to serve as collateral and to generate cash flows for the notes. The Issuer acquired the CLO collateral and conveyed it to a trust under an indenture between the Issuer and U.S. Bank National Association, as Trustee (the “Indenture”). Defendant-appellee Acis Capital Management, L.P. (“Acis”) was engaged as the CLO’s portfolio manager pursuant to a Portfolio Management Agreement between the Issuer and Acis (the “PMA”).2 Under the PMA, Acis agreed “to supervise and direct the investment and reinvestment” of the collateral and to “comply with all the terms and conditions of the Indenture.” App’x at 750. Defendant-appellee Joshua N. Terry is the sole member of Acis, and defendant-appellee Brigade Capital Management, LP (“Brigade”) was engaged as a subadvisor to assist Acis with its asset management duties and to provide back-and middle-office functions. NexPoint claims that Acis, Terry, and Brigade (together, the “Advisers”) maximized their own profits at the expense of the CLO, in violation of fiduciary duties imposed by §206 of the IAA. The Advisers allegedly: (1) selected collateral with distant maturity dates in order to generate fees over a longer period of time, see App’x at 123-25, 134; (2) selected overly risky collateral, see App’x at 125-26; (3) engaged in trades that were poorly timed in light of market conditions, see App’x at 126; and (4) otherwise caused the CLO to incur unexplained and exorbitant expenses, see App’x at 108. NexPoint alleges that, in addition to breaching fiduciary duties, this conduct also breached the PMA and the Indenture. Most pertinent here, the Indenture requires that any purchases of additional collateral satisfy certain “collateral quality tests” intended to ensure the creditworthiness of the CLO’s assets. App’x at 119, 54; see also App’x at 613-15. One such test — weighted average life (“WAL”) — measures the “average maturity of debt instruments in the CLO.” App’x at 115, 35. NexPoint claims that after the CLO registered a failing WAL score, the Advisers bought collateral “that did not improve the WAL, thereby violating the terms of the relevant indenture.” App’x at 124, 88. The Advisers also allegedly bought nineteen loans with low credit ratings in a single day, “likely in a scheme to circumvent the requisite WAL thresholds.” App’x at 125, 96. Another such test — weighted average rating factor (“WARF”) — “demonstrates the credit quality of a CLO’s entire portfolio.” App’x at 115, 34. NexPoint alleges that the Advisers bought overpriced, low-quality assets, causing the CLO’s assets to be “well short of the required WARF,” and violating the Advisers’ duties to “seek best execution” under the PMA and the Indenture. App’x at 126,
