The SEC has fined Galois Capital Management LLC, a crypto hedge fund, $225,000 for improper client asset management and misleading investors about redemption processes.
Violations and Mismanagement
Between July and November 2022, Galois Capital did not keep certain crypto assets with a qualified custodian as required by the Investment Advisers Act’s Custody Rule. Instead, these assets were left in online accounts on platforms like FTX, which did not meet the necessary standards. When the exchange collapsed, Galois lost about half of the fund’s assets. Additionally, investors were given conflicting information about the notice required for withdrawals: some were told they needed at least five business days' notice before the end of the month, while others got their money out faster with fewer days' notice.
Statement from SEC
Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, stated: **"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.”**
Context and Further Actions
Galois Capital did not admit or deny the findings but agreed to stop further violations and pay the fine, which will go to the investors who lost out. This penalty is part of the SEC’s broader crackdown on the crypto industry. Just a few hours before this update, SEC Commissioner Mark Uyeda suggested creating special S-1 registration forms for "digital asset securities." Speaking at Korea Blockchain Week 2024, he noted that current forms don’t fit the bill for digital assets, which are increasingly being treated as securities. Uyeda believes these new forms could reduce regulatory headaches for digital asset sponsors and provide better disclosures about these assets. This call for change comes as major crypto firms like Ripple and Coinbase continue to push back against the SEC, arguing that the rules are unclear about what counts as a security.
The SEC's actions are aimed at tightening regulation of the crypto industry and providing greater protection for investors. Fines and new registration forms may help create a more transparent and safer investment environment.
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