Pay to Play in Investment Management

Abstract

From 2001 to 2016, using the population of all investment advisory firms registered with the U.S. Securities and Exchange Commission (SEC), we document that the presence of government clients (e.g., public pension plans) for an investment advisory firm is strongly associated with past owner and officer contributions to state government officials. To help establish a causal link, we use the adoption of the SEC’s pay to play rules for investment advisors in 2011. Post implementation of the SEC’s pay to play rules, we find that this relationship weakens considerably. Further consistent with a pay to play explanation, the results are driven by advisors whose political contributions are made by senior officers likely to be involved in capital raising for the firm including CEOs, owners/partners, and sales executives. The results are most pronounced for advisors offering pension consulting services, advisors catering to institutional accounts (e.g., institutional asset managers), and advisory firms headquartered in states with a high concentration of public pension plans and a culture of political corruption.

Keywords: Investment management, public pension plans, political contributions

JEL Classification: G11, G23