SEC Fines Galois Capital $225K Penalty for Custody Rule Breach and Investor Deception

• Galois Capital lost half of its assets after depositing them on unqualified platforms, violating SEC’s Custody Rule.
• The SEC found Galois misled investors on redemption notice periods, treating some clients more favorably than others.
• Galois Capital agreed to settle SEC charges, accepting a $225,000 fine and censure without admitting or denying the violations.

The U.S. Securities and Exchange Commission (SEC) has imposed a $225,000 civil penalty on Galois Capital Management LLC, a crypto investment advisory firm, for violating investor protection regulations. 

The SEC found that Galois failed to comply with the Custody Rule, which safeguards customer assets, and misled investors regarding redemption notice periods. These actions exposed Galois Capital’s clients to risks, especially as the firm suffered major losses after the collapse of the crypto exchange FTX.

SEC Investigation Unveils Custody Rule Violations

Beginning in July 2022, Galois Capital failed to ensure that certain crypto assets under its management were maintained by a qualified custodian. This violation of the Investment Advisers Act’s Custody Rule came to light during the SEC’s investigation. 

Notably, Galois had stored crypto assets on online trading platforms, including the now-defunct FTX, which did not meet the SEC’s qualified custodian requirements. As a result, approximately half of the fund’s managed assets were lost when FTX collapsed in November 2022.

The SEC highlighted that these violations left Galois’ investors vulnerable to potential misuse or misappropriation of their assets. This failure to secure crypto assets in compliance with the Custody Rule led to the charges.

Misleading Investors on Redemption Notices

In addition to the custody issues, the SEC found that Galois Capital had misrepresented important details about its redemption policy. Galois had told certain investors that redemptions required a minimum notice of five business days before the end of the month. 

However, it later allowed other investors to redeem their assets with fewer days’ notice. This discrepancy raised concerns about fair treatment among investors and further violations of SEC regulations.

Settlement and Penalties Imposed by the SEC

Galois Capital, without admitting or denying the SEC’s findings, agreed to settle the charges. The firm consented to cease further violations, received a censure, and accepted a civil penalty of $225,000. This fine will be distributed to investors harmed by Galois’ actions. The SEC emphasized that they would continue holding advisers accountable for violating core investor protection rules.