The Securities and Exchange Commission is investigating the way investors are given allocations of bonds in sought-after offerings, such as the Verizon Communications issue, according to people familiar with the matter.
Requests for information have been sent to banks including Goldman Sachs and Citigroup, as officials examine whether representations were made by customers in an attempt to procure bonds they otherwise would not get.
This includes whether investors submitted bids under the guise of several different entities to secure a bigger slice of some of the hottest bond offerings.
It is not clear which investor allocations are under review. Pimco, BlackRock and other large investors either declined to comment or did not respond to requests for comment.
Goldman disclosed in its annual 10-K filing that it was under investigation for “allocations of and trading in fixed-income securities”, without providing details.
The bank did not participate in the Verizon offering but is responding to regulatory inquiries over other large corporate issuances.
The way big banks divvy up new bonds to their clients has shifted in recent years as large investors such as Pimco and BlackRock dominate an increasingly large portion of intensely competitive debt markets.
Corporate bond issuance last year was marked by two supersized issues – a $49bn bond from Verizon Communications and a $17bn offering from Apple.
Verizon’s deal was so large it did not just add to the pool of outstanding US corporate bonds, it briefly became the entire market by eclipsing the $18bn worth of corporate debt that typically changes hands in a normal day’s trading.
Verizon’s debt offering in September last year came under particular scrutiny after BlackRock and a handful of other large institutional investors took outsized allocations, angering some smaller market participants. “With every single global bond manager out there looking for yields, that competition gets pretty fierce in some of these sales,” said Adrian Miller, director for fixed income strategy at GMP. “Bottom line: the laws of large numbers dictate that the small guys have a harder time in some of these deals that everybody wants to get in.”
Three people familiar with the matter said the SEC inquiry started at the end of last year and involved multiple banks and several debt offerings by large companies.
“Small buyside firms are angry that the big guys – the Pimcos, the BlackRocks – get these massive allocations and there’s nothing left for them,” said one banker. “We need to give huge allocations to the Pimcos and BlackRocks of the world.”
Some banks and investors believed the probe, which appears to be at an early stage, is unlikely to find wrongdoing because there were no clear cut rules around how banks should dole out bond issuances among investors.
A fixed income portfolio manager said: “Regulators have been trying to crack down on these practices for some time. Honestly, I’m not sure how they will do it because this is not illegal. It’s just favouritism.”
Chris Keith, senior vice-president of fixed income at Adviser Investments, an independent money management firm, said: “Goldman has to build the book to sell $17bn of Apple bonds. Do they really want to go around to a guy like me who might be interested in buying $500,000 worth?”
The SEC declined to comment. Verizon, Goldman and Citi also declined to comment.
Additional reporting by Vivianne Rodrigues and Stephen Foley