Thomas Daniels
The U.S. Securities and Exchange Commission (SEC) has charged Galois Capital, a Florida-based investment firm, with significant compliance failures and misleading investors. These allegations stem from the firm’s failure to adhere to required custody practices and providing misleading information regarding its redemption policies.
According to the SEC’s order, Galois Capital, formerly a registered investment adviser for a private fund focused on cryptocurrency investments, violated the Investment Advisers Act’s Custody Rule. This regulation mandates that client assets, including those classified as securities, must be held with a qualified custodian.
From July 2022 onwards, Galois Capital failed to comply with these regulations, holding crypto assets in trading accounts on platforms like FTX Trading, which are not recognized as qualified custodians by the SEC. This breach in custodial practices resulted in substantial losses, including approximately half of the fund’s assets under management following the collapse of FTX in November 2022.
Misleading Investors
The SEC also found that Galois Capital misled investors concerning redemption procedures. According to the SEC’s filing, the firm informed some investors that redemptions required a minimum of five business days’ notice before the end of the month, while allowing others to redeem with shorter notice periods. This inconsistency led to misleading information about the terms and conditions governing their investments.
By failing to comply with the Custody Rule, Galois Capital exposed investors to considerable risks, including potential loss, misuse, or misappropriation of their assets. The SEC remains resolute in holding advisers accountable who violate essential investor protection obligations.
Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, emphasized the importance of these compliance measures in safeguarding investor interests.
To settle the charges, Galois Capital has agreed to pay a civil penalty of $225,000, which will be distributed to compensate the fund’s affected investors. Without admitting or denying the SEC’s findings, the firm has also agreed to refrain from further violations of the Advisers Act and has been formally censured.
