SEC Fines Crypto Fund Galois Capital for Custody Rule Violations
In a recent development that underscores the ongoing regulatory scrutiny in the cryptocurrency sector, the U.S. Securities and Exchange Commission (SEC) has imposed a $225,000 fine on Galois Capital Management LLC, a Florida-based investment advisory firm specializing in crypto assets. The penalty comes as a result of the firm’s failure to comply with crucial custody rules and allegations of misleading investors about redemption policies.
Galois Capital, which managed a private fund primarily invested in cryptocurrencies, found itself in hot water for violating the Investment Advisers Act’s Custody Rule. The SEC’s investigation revealed that beginning in July 2022, the firm failed to ensure that certain crypto assets held by its fund were maintained with a qualified custodian. Instead, Galois Capital opted to store these assets in online trading accounts on various crypto platforms, including the now-defunct FTX Trading Ltd.
This decision proved catastrophic when FTX collapsed in November 2022, resulting in the loss of approximately half of the fund’s assets under management. The incident highlights the risks associated with improper custody practices in the volatile crypto market and the importance of regulatory compliance.
Adding to its troubles, the SEC also found that Galois Capital misled some investors regarding redemption policies. The firm allegedly represented to certain investors that redemptions required at least five business days’ notice before the month’s end, while simultaneously allowing other investors to redeem with shorter notice periods. This inconsistency in policy application raised concerns about fair treatment of investors and transparency in fund operations.
Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, emphasized the gravity of the violations, stating, “By failing to comply with Custody Rule provisions, Galois Capital exposed investors to risks that fund assets, including crypto assets, could be lost, misused, or misappropriated.”
The case against Galois Capital serves as a stark reminder of the regulatory challenges facing crypto-focused investment firms. As the digital asset space continues to evolve, regulators are intensifying their efforts to ensure that investment advisers adhere to established rules designed to protect investor interests.
Without admitting or denying the SEC’s findings, Galois Capital has agreed to cease and desist from further violations of the Advisers Act. The firm, which shut down in early 2023 following the FTX debacle, will pay the $225,000 civil penalty, which the SEC plans to distribute to the fund’s affected investors.
This enforcement action by the SEC sends a clear message to the crypto investment community: compliance with custody rules and transparent communication with investors are non-negotiable, regardless of the asset class. As the regulatory landscape for digital assets continues to develop, investment advisers in the space must prioritize robust compliance frameworks to avoid similar pitfalls.
