SEC Charges Investment Adviser for Illegal Cross Trading

ADMINISTRATIVE PROCEEDING
File No. 3-20039

September 21, 2020 – The Securities and Exchange Commission today announced settled charges against Kansas-based Palmer Square Capital Management LLC, a registered investment adviser, for hundreds of illegal cross trades between its clients’ accounts.

The SEC’s order finds that, from July 2014 through September 2016, Palmer Square prearranged buys and sells of the same security in the same amount from one client account to another over 350 times. The trades involved approximately forty client accounts, including those of registered investment companies Palmer Square advised. The order finds that Palmer Square failed to engage in a process to determine, on the basis of reasonable inquiry, the average of the highest current independent bid and lowest current independent offer for cross trades involving these registered investment company clients. The order further finds that the Palmer Square clients on the purchasing side of the cross trade always paid a markup, which was retained by the executing broker-dealer, and that Palmer Square inaccurately informed the boards of its registered investment company clients that it had not engaged in cross trades. Because of this conduct, Palmer Square caused its registered investment company clients to violate statutory prohibitions against cross trading, without complying with the requirements for the exemption set forth in Rule 17a-7 under the Investment Company Act of 1940. According to the order, Palmer Square also failed to provide required disclosures to and obtain consent from other clients involved in principal trades, and did not adopt and implement appropriate policies and procedures to prevent its violations.

The SEC order finds that Palmer Square willfully violated Sections 206(3) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder, and caused its clients to violate Sections 17(a)(1) and 17(a)(2) of the Investment Company Act and Rule 38a-1 thereunder. Without admitting or denying the findings, Palmer Square consented to a cease-and-desist order, a censure, and a civil penalty of $450,000.

The SEC’s investigation was conducted by Amy Sumner and Dee Raibourn of the Complex Financial Instruments Unit, with assistance from Judy Bizu, and was supervised by Laura Metcalfe and Daniel Michael. The examination preceding the investigation was conducted by Brian Blaha, Jason Morrison, Andrea Muller, Sue Sipes, and Jen Welsh of the Denver and Philadelphia Regional Offices.