SEC censured Galois Capital over crypto custody failures tied to FTX

The U.S. Securities and Exchange Commission censured Galois Capital Management on September 3, 2024, finding that the former registered investment adviser violated federal custody, compliance and investor-disclosure requirements while managing a private crypto fund. Galois agreed to a cease-and-desist order and a $225,000 civil penalty without admitting or denying the SEC’s findings.

The action mattered beyond the size of the penalty. It applied established investment-adviser obligations to crypto assets and connected deficient custody arrangements with the institutional damage caused by FTX’s November 2022 collapse. The order did not create a new custody rule, classify every crypto asset as a security or establish requirements for investors outside its stated facts.

What the SEC found

Galois registered with the SEC as an investment adviser on July 8, 2022, and withdrew that registration on December 22, 2022. It advised the Galois Capital Alpha Fund, a private fund that primarily invested in crypto assets, including assets the SEC described as crypto asset securities.

According to the settled order, Galois held certain crypto asset securities in online accounts on trading platforms that were not qualified custodians under the Investment Advisers Act’s Custody Rule. FTX Trading was one specifically identified platform. The SEC found that the relevant accounts were not maintained by institutions fitting the rule’s categories, such as banks, registered broker-dealers, registered futures commission merchants or qualifying foreign financial institutions.

The SEC said approximately half of the fund’s assets under management in early to mid-November 2022 were lost in connection with FTX’s collapse. That percentage applies to the fund’s assets during that November window. It should not be multiplied by the approximately $205 million in regulatory assets under management reported on Galois’s June 1, 2022 Form ADV: the figures describe different dates and measures, and the order did not state an exact dollar loss.

The Commission also found that Galois lacked written compliance policies and procedures reasonably designed to prevent Advisers Act violations while it was registered.

Redemption disclosures were a separate failure

The fund’s limited partnership agreement generally required 30 days’ written notice for a month-end redemption unless its general partner approved a shorter period. Galois developed an informal practice of accepting at least five business days’ notice and communicated that practice to certain investors, but not all investors.

The SEC found that Galois then allowed certain investors, including affiliated investors, to redeem with fewer than five business days’ notice while presenting a different policy or practice to others. The order treated that unequal disclosure as misleading. It did not find that every shortened redemption violated the partnership agreement, which expressly allowed the general partner to approve shorter notice.

The institutional lesson on September 3

A trading venue and a qualified custodian serve different functions under the custody framework. A platform may provide liquidity and account access without satisfying the legal and operational conditions imposed on an adviser entrusted with client securities. Galois’s FTX exposure made that distinction concrete: exchange access did not insulate fund assets from a platform’s financial collapse.

The settlement created a Fair Fund for distribution to eligible, unaffiliated fund investors. The order required Galois to deposit the $225,000 penalty within 10 days and later submit a distribution calculation for SEC staff review. Those provisions established a remediation process, not evidence that affected investors had received payments by September 3, 2024.

No event-day cryptocurrency price, trading-volume or market-capitalization claim is needed to establish the development. The verified record is regulatory and institutional: the SEC applied existing adviser rules to specified crypto asset securities, documented custody and disclosure failures, and imposed agreed sanctions while leaving broader digital-asset classification questions unresolved.