Financial and Operational Requirements: Capital, Client Assets, and Resilience
Why capital rules exist
The financial requirements exist to protect clients and the integrity of the market, not to maximize profit. Candidates must understand minimum capital and risk-adjusted capital: the firm must hold capital sufficient to absorb losses and wind down in an orderly fashion. Know the concept of early warning thresholds - levels above the minimum that trigger notification and remediation before a breach occurs. A common trap is treating a capital breach as a reporting event only; it is also a supervisory event requiring immediate notification and a remediation plan.
Client assets and segregation
Understand segregation of client assets from firm assets, the requirement to hold client cash and securities in trust or designated accounts, and the controls over transfers, withdrawals, and third-party deposits. Know the know-your-client and client identity requirements that support anti-money-laundering obligations, and understand the firm's duty to monitor for suspicious activity and report it to the appropriate authority.
Operational resilience
Know the elements of operational risk management: business continuity planning, cybersecurity controls, third-party and vendor risk, recordkeeping and retention, and segregation of duties in cash handling. Understand that outsourcing a function does not outsource accountability - the firm remains responsible for the control.
Traps in questions
Watch for answers that assume client cash may be used for firm liquidity, or that a vendor's certification replaces the firm's own due diligence. Another trap: assuming records may be destroyed once an account closes; retention periods generally run from the event, not the closing.
Rule of thumb
For any financial-control question, ask three questions: whose money is it, where is it held, and who can move it? If the answer to the third is one person with no oversight, the control is deficient.
Worked example
A client asks to deposit funds from a third party's account. The correct response is to apply the firm's third-party deposit procedures, verify the source and authority, document the review, and escalate if the pattern is unusual - not simply to accept the deposit because the client requested it.