The U.S. Securities and Exchange Commission (SEC) has charged Florida-based Galois Capital with serious compliance failures and investor misrepresentation.
The charges relate to the firm’s failure to adhere to required custody practices and misleading information about redemption policies.
According to the SEC’s order, Galois Capital, previously a registered investment adviser for a private fund primarily investing in crypto assets, breached the Investment Advisers Act’s Custody Rule. This rule mandates that client assets, including those offered and sold as securities, must be maintained with a qualified custodian.
However, since July 2022, Galois Capital did not comply with these regulations, holding crypto assets in trading accounts on platforms like FTX Trading, which are not deemed qualified custodians by the SEC.
This lapse in custodial practices led to substantial losses, with approximately half of the fund’s assets under management lost during the collapse of FTX in November 2022.
Misleading investors
In addition to custody failures, the SEC found that Galois Capital misled investors regarding redemption procedures.
According to the SEC’s filing, the firm informed some investors that redemptions required at least five business days’ notice before the end of the month, while others were allowed to redeem with shorter notice periods.
This inconsistency in redemption policies resulted in misleading investors about the terms and conditions applicable to their investments.
By failing to comply with Custody Rule provisions, Galois Capital exposed investors to significant risks, including the potential loss, misuse, or misappropriation of their assets. The SEC remains committed to holding advisers accountable who violate fundamental investor protection obligations.
Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.
To resolve the charges, Galois Capital has agreed to a settlement with a civil penalty of $225,000. This penalty will be distributed to compensate the fund’s harmed investors.
Without admitting or denying the SEC’s findings, the company has agreed to cease any further violations of the Advisers Act. Additionally, Galois Capital has been formally censured as part of the order.
