Galois Capital settles with SEC, pays $225K for Custody Rule violations.
SEC enforcement follows Galois Capital's 50% asset loss post-FTX collapse.
Galois misled investors on redemption terms, impacting asset withdrawals.
Galois Capital Management, an investment advising firm focusing on cryptocurrency, and the U.S. Securities and Exchange Commission (SEC) have settled. The SEC has imposed enforcement action on the firm for noncompliance with the Custody Rule under the Investment Advisers Act, primarily involving crypto assets, including the FTX trading platform, which collapsed in November 2022 due to unqualified custodians.
Details of the Settlement
Without admitting or denying the charges, the agency reached a cease-and-desist order agreement with Galois Capital to avoid the said violations in the future. The firm is also to pay $225,000 in penalties to be reverted towards the investors who fell victim to their actions.
This settlement follows the SEC's investigation, which revealed that Galois Capital misinformed investors concerning the safety of their assets and the conditions under which they could redeem investments.
Impact on Investors
The SEC noted that Galois Capital's lack of regulatory standards or failure exposed investors to many risks, including potential loss or misuse of their assets.This was dramatically realized during the collapse of FTX, which saw Galois Capital lose almost half of the assets under management, negatively impacting firm operations and the clients' financial position.Â
The firm was also engaged in a scenario where it misreported the period of notice on redemptions, thereby allowing some limited partners to effect the redemption of the asset with less than what the period required by standard measures.
Regulatory Response and Industry Reaction
Corey Schuster, co-chief of the SEC Enforcement Division's Asset Management Unit, said the regulatory body is determined to enforce rules protecting investors' rights. Reaction within the industry has been mixed.Â
Some have decried the SEC action as heavy-handed, particularly considering the nature of the collapse of FTX. Others in the community saw such actions as necessary to maintain market integrity and investor trust in an increasingly complex space of crypto assets.
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