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Now, on to the news:

Will a Party Put Goldman in Hot Water? It’s not often that a social gathering causes a flurry of agitation that could blow back on a Wall Street bank. But Goldman Sachs’ John Rogers (a noted member of the D.C.-New York soiree set) may have accomplished just that. In an only-in-Washington tale, some powerful House Republicans are miffed by his decision to host an exclusive book party earlier this month for two New York Times reporters. Their best-seller has garnered a lot of buzz for its revelations about Minority Leader Kevin McCarthy – a man whose power could rise considerably if Republicans, as many expect, win the House majority.

Rogers’ party, which he hosted in his capacity as chairman of the White House Historical Association, was held at the Decatur House. It was, by most counts, a success. A large crowd of journalists attended, as did other big names. James Carville hobnobbed with Dame Karen Pierce, the British ambassador to the U.S. (The highlight of their conversation, according to one observer, came when the Ragin’ Cajun told her that he was heading to London, where the NFL is playing several games this fall, “to see the Saints.” Pierce replied, “Is that a band?”) The authors, Jonathan Martin and Alexander Burns, gave a well-received talk about their book, “This Will Not Pass: Trump, Biden and the Battle for America’s Future.” The discussion was moderated by Joe Wall, a Goldman Republican lobbyist, and didn’t focus at all on McCarthy, one person said.

Still, the event has aggrieved some lawmakers and their staff, according to Capitol Hill sources and people close to the minority leader, with a handful wondering if Rogers, Goldman’s most astute Washington operator, made a serious political misstep. The episode, the people predict, could very well dent the bank’s relations with House Republicans – an increasingly populist group that has grown distrustful of corporations, particularly Wall Street firms, that they see as ``woke.’’

Though most of them profess not to have read the book, House Republicans know McCarthy is a prime target. As the Atlantic pointed out in a May article, ``[T]he object of the authors’ undisguised contempt, is House Minority Leader Kevin McCarthy.’’ The book detailed a private call with the Republican leadership team where the minority leader asserted that he was ``done with’’ President Donald Trump and would press him to resign in the wake of the Jan. 6 attack. McCarthy then denied making those remarks – before Martin and Burns released a recording that backed up their account.

The flap helped sell a lot of books, but ultimately did little harm to McCarthy. Trump remained unperturbed and the minority leader’s fellow Republicans gave him a standing ovation when he discussed the comments in a conference meeting. Nevertheless, a number of Republicans close to McCarthy are enraged about the leaked tape, asserting that it was an unethical breach of privacy and part of a plot to block him from becoming speaker. They’re also unhappy that the recording shined an uncomfortable spotlight on his No. 2, Rep. Steve Scalise, who was heard criticizing fellow Republicans.

Rogers, a former aide to President Ronald Reagan who also worked at the State Department and the Treasury, is a powerful figure at Goldman where he’s been since 1994. One of the most senior executives at the bank, he oversees its government relations work, among other duties. Rogers has been friendly with McCarthy for years, and they’ve spent time together at intimate dinners as well as black-tie events. Rogers’ daughter interned for the California congressman, and McCarthy spoke at a high-profile summit Goldman held several years ago in Washington, to promote its work for small businesses.

McCarthy speaks at Goldman small business summit

Whether the relationship continues on such good terms, remains to be seen. Spokespeople for Goldman and McCarthy declined to comment.

Rogers, by the way, isn’t the only Goldman executive who may find himself dealing with book-party fallout. Wall was also spotted at a different event on the New York Times reporters’ tour. The hosts of that one, D.C. public relations firm Narrative Strategies, posted photos of the May 31 luncheon on Twitter, and within hours a group of current and former House Republican leadership staff were sending around the pictures.

Gensler and “Group” Dynamics — The ESG Version: The SEC’s proposal to “modernize” the disclosure rules surrounding activist investing has, predictably, been panned by hedge funds that make money by pushing companies to revamp their businesses. And, it’s been largely embraced by corporations that don’t like outsiders meddling in their affairs.

But a more complicated narrative was recently raised by a former employee of a tiny investment firm called Engine No. 1. It’s a story of the potential for unintended consequences that progressive Democrats and their environmentalist allies may want to hear.

Engine No. 1 spearheaded a campaign in 2021 that shook up the board of Exxon Mobil, stoking optimism that pro-environment investors could adopt activist tactics and actually make headway against massive energy companies accused of polluting the planet. Arguing that Exxon needed to reduce its carbon footprint to remain profitable, Engine No. 1 forced three new directors onto the oil titan’s board.

Charles Penner, who was Engine No. 1’s head of active engagement before stepping down late last year, is now publicly panning the SEC proposal, pointing out that proponents of the environmental, social and governance movement would suffer. ``The changes proposed by the SEC move in the wrong direction by disincentivizing shareholder activism of any type,’’ Penner wrote in an April letter to the regulator.

The SEC’s activist disclosure rule has two main parts: cutting the time period for when investors must reveal their big stakes in companies from 10 to five days, and specifying what is considered a ``group’’ of dissidents working together on a campaign. SEC Chair Gary Gensler has said the proposal will boost transparency and modernize regulations so they’re more in sync with today’s fast moving markets. He added that any delay in disclosing large stock positions can disadvantage ordinary investors. That’s because it increases the chances they will sell to an activist before its campaign is revealed, an announcement that almost always triggers a surge in the share price.

It’s the SEC’s proposed definition of a group that has stirred anxieties among some in the ESG crowd, who say the change could discourage shareholders from even communicating with each other. Such communication was crucial to the Engine No. 1 victory. The longshot bid succeeded because it won the backing of BlackRock, Vanguard and State Street, which were Exxon’s three largest shareholders. Engine No. 1 never would have stood a chance on its own. The fund held Exxon shares worth just $40 million, equivalent to a 0.02 percent stake.

Some critics are predicting that the SEC’s proposed group definition would cause major asset managers, fearful of getting sued by the agency, to let calls from activists go straight to voicemail. It also may make it more likely that the firms would be forced to identify themselves publicly as participating in an activist campaign – something they are loath to do since it could anger the companies they invest in long term as passive stockholders.

An SEC spokesmen didn’t respond to a request for comment.

Frank Partnoy, a professor at the U.C. Berkeley School of Law, is among critics who say the SEC’s proposal is murky enough that it would chill future communications. In a comment letter to the SEC that he co-signed, Partnoy noted that the revisions could have sweeping ramifications for many progressive touchstones, including efforts to increase board diversity, climate initiatives and campaigns aimed at improving labor conditions.

``If you are an investor pushing for ESG issues and you talk to another investor who owns 5 percent of the stock, you could be in violation of the securities rules,’’ Partnoy says.

Not everyone agrees. The AFL-CIO, in a June 4 letter to the SEC, contends that shareholders who band together to push social issues aren’t seeking ``a change in control of the company,’’ so they won’t be captured by the agency’s rule.

Tyler Gellasch, a former SEC official who’s now executive director of the Healthy Markets Association, has a more nuanced view. Some hedge funds are pushing the argument that ESG is threatened because it’s a convenient strategy to ``kill the whole rule,’’ he says. But Gellasch does concede that the SEC should have been clearer in how it dealt with groups. Lots of smart investors and lawyers are concerned, he says.

``My view is that they do have more work to do,’’ on the rule, says Gellasch, who adds that he strongly supports forcing activists to disclose their stakes in companies sooner.

The Big Picture: SEC staff members, according to several sources, were surprised at the aggressive pushback the agency received on the group provision from a wide variety of commentators, including investor advocates, law professors and hedge funds. There’s a good chance that it undergoes a major revamp before a final rule is issued.

One More Thing: Partnoy is a co-founder of the International Institute of Law and Finance, a non-profit that has disclosed it receives compensation for helping write comment letters to the SEC. The IILF, along with the law schools at Berkeley and New York University, is hosting an event tomorrow on the SEC activist proposals. Speakers include Penner, as well as David Katz and Leo Strine from Wachtell, Lipton, Rosen & Katz, the white shoe law firm that has led the way in helping corporations fend off activists. You can register here.

Lastly: Think Gensler has an ambitious policy agenda? It was probably not an easy weekend for regulatory lawyers. Today is the comment deadline for three proposed rules. Here is an overview (and expect some Capitol Account stories soon, as the letters post):

SPACs: SPACs, which boomed during the pandemic, have come under scrutiny largely over two criticisms. 1) Murkiness in securities laws enables the companies to make wild projections about their future business prospects, something firms pursuing traditional IPOs can’t do. 2) SPAC sponsors have misaligned profit incentives because they can get rich even when closing deals that turn out to be awful for shareholders.

The SEC would address No. 1 by making it easier to hold SPACs, their Wall Street underwriters and even the companies SPACs acquire liable for false statements. No. 2 would be dealt with by forcing sponsors to boost disclosure about their potential payouts and conflicts of interest.

Fund Fees: In February, the SEC proposed a rule that would require hedge funds and private-equity firms to provide investors with detailed quarterly overviews of fees. It would also prohibit certain fee arrangements, including instances where fund managers pass on the cost of SEC inspections and investigations.

Exchange Rules: Firms that solely execute trades of U.S. Treasuries and other government securities have long been exempt from having to register as a stock exchange, or as a so-called ATS – a less strict set of rules. The SEC wants to change that. More controversially, the agency also is demanding that firms it calls communication protocol systems also register as an exchange or ATS. Look for some peeved letters from crypto firms. The industry contends Gensler is using the proposal as a backhanded way of forcing digital token platforms to submit to SEC oversight.

For the fee and exchange proposals, today’s deadlines are actually an extension of 30-day comment periods. Many are wondering if that means the agency – and Gensler – are now taking the risk of lawsuits a little more seriously.

Tomorrow:

Genlser speaks at 8:30 AM ET at the 2022 RFK Compass Summer Investors Conference.
Gensler also appears at 1:20 PM ET at the Wall Street Journal CFO Network Summit.
CFTC Chairman Rostin Benham is doing a 2:50 PM ET fireside chat at the U.S. Institute 2022 CEO roundtable.
CFTC Commissioner Christy Goldsmith Romero speaks at 8 AM ET at Axio’s Crypto & the Investing Space.
CFTC Commissioner Caroline Pham speaks at 2 PM ET at the Trading Evolved U.S. Trading and Best Execution Summit.
The Senate Banking Committee holds a 10 AM ET hearing on index fund voting in shareholder elections.

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