Houston Investment Adviser Sanctioned for Violations of 'Custody Rule'

May 23

Texas Securities Commissioner John Morgan on May 23 entered a Consent Order against Post Oak Investment Management Inc., a Houston investment adviser. 

Post Oak Investment Management paid a $1,000 fine and was reprimanded for violating the State Securities Board’s “custody rule,” which requires registered investment advisers to comply with certain requirements if they maintain custody of client funds or securities.

As the general partner for a pooled investment vehicle, the Post Oak Investment Fund LP (the “Fund”), Post Oak had custody of client funds and securities. Post Oak did not implement certain safeguards required by the custody rule.

Specifically, Post Oak failed to reasonably ensure that the custodian delivered the Fund’s account statements to the investors and failed to retain an independent public accountant to conduct unannounced and independent verification of the funds and securities in the custody of Post Oak.

Post Oak could have qualified for exceptions to these particular safeguards if the Fund’s investors had been provided annual financial statements audited by an accountant registered with the Public Company Accounting Oversight Board. Post Oak did not qualify for this exception, however.

Not providing account statements isn’t unusual, said Ronak Patel, the Deputy Securities Commissioner. “Often fund managers elect not to provide investors with account statements in order to shield the managers’ trading strategies,” he said.

Patel said making that choice means that the investment fund must incur the expenses of an annual audit if the adviser is going to comply with the custody rule.

“This action highlights the importance of the custody rule, but also reminds investment advisers to proactively consider how they will comply with it,” he said.

In addition to paying the administrative fine, Post Oak must provide certain account statements, dating from January 2012, to each limited partner of the Fund.

Post Oak must also provide financial summaries prepared by an independent accountant to the Fund’s limited partners.