According to a Sept. 3 announcement, the United States Securities and Exchange Commission (SEC) has charged fund adviser Galois Capital Management with failing to properly custody client assets, including holding investor funds with the now-defunct cryptocurrency exchange FTX.

The charges cite alleged violations of the SEC’s custody rule, which mandates that investment advisers who custody client funds must hold those funds with a qualified custodian, such as a registered broker-dealer or bank.

According to the SEC, Galois held crypto assets in online trading accounts on various crypto exchanges, including FTX Trading Ltd. In November 2022, the fund lost approximately half of its assets due to FTX’s collapse.

Related: Exclusive: Fireblocks granted New York charter for crypto custody

SEC charges fund adviser Galois Capital for FTX crypto custody image 0

Digital asset custodians often seek a New York trust charter. Source: NYDFS

Failing to comply with custody rule provisions “exposed investors to risks that fund assets, including crypto assets, could be lost, misused, or misappropriated,” Corey Schuster, co-chief of the SEC enforcement division’s asset management unit, said in a statement, adding: 

“We will continue to hold accountable advisers who violate their core investor protection obligations.”

Since 2021, the US has seen a proliferation of qualified digital assets custodians, including Anchorage Digital Bank, Fireblocks Trust Company, Coinbase Custody Trust, and Fidelity Digital Asset Services. Bahamian crypto exchange FTX was never one of them. 

FTX collapsed in November 2022 due to a severe liquidity crisis and allegations of mismanagement and fraud. This resulted in billions in customer funds being inaccessible and the company filing for bankruptcy.

The agency also alleges Galois misled fund investors about the notice period required for redemptions. The fund adviser “misled certain investors by representing to them that redemptions required at least five business days’ notice before month end while allowing other investors to redeem with fewer days’ notice,” the SEC alleges.

The SEC said Galois agreed to pay a civil penalty of $225,000, which will be distributed to its fund’s harmed investors. 

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