Prop firm regulation is not one perimeter but five, and most funded-account programmes sit outside all of them by design: participants are not clients, challenge fees are not client money, and the accounts are simulated, so there is often no custody and no regulated instrument. The exception is the one that matters — where a firm becomes the counterparty to a leveraged retail trade, the Commodity Exchange Act reaches it, simulated environment or not.

The clearest statement of that principle is not in a rulebook. It is in a 28-page opinion from the United States District Court for the District of New Jersey, in which Judge Zahid N. Quraishi found the Commodity Futures Trading Commission (CFTC) had made a prima facie case that a funded-account operator was an unregistered retail foreign exchange dealer under Section 2(c)(2)(C) of the Commodity Exchange Act (CEA) and Regulation 5.1(m), 17 C.F.R. § 5.1(m). That case — CFTC v. Traders Global Group Inc., No. 1:23-cv-11808 (D.N.J.) — was then dismissed with prejudice, as a sanction against the CFTC. Both halves of that outcome matter, and this analysis works through why.

Key facts

• The test that catches a prop firm: CEA § 2(c)(2)(C) gives the CFTC jurisdiction over a foreign-currency transaction offered to a person who is not an eligible contract participant (ECP) on a leveraged, margined or offeror-financed basis. Acting as counterparty makes a firm a retail foreign exchange dealer (RFED) that must register under 17 C.F.R. § 5.3(a)(6)(i).
• Who is not an ECP: essentially every retail challenge-taker. The CEA § 1a(18) threshold for an individual is more than $10 million invested on a discretionary basis, or $5 million when hedging.
• Scale of the internalisation: between November 1, 2021 and October 14, 2022 the defendant had at least 135,000 unique customers, about 24,000 on so-called “live” accounts. Of those, no more than 100 had a single order executed against an external counterparty. Fees collected exceeded $310 million; at least $159 million went to successful customers, funded from fees (ECF No. 134, November 14, 2023).
• How the case ended: dismissed with prejudice on May 13, 2025 as a Rule 11 and inherent-authority sanction; on July 11, 2025 the court awarded the defendants $3,148,484.22 in fees and costs against the CFTC (ECF Nos. 260, 269).
• The equities route: FINRA Rule 1220(b)(4) requires anyone engaged in proprietary trading of equity, preferred or convertible debt securities otherwise than on an exchange to register as a Securities Trader, passing the Securities Industry Essentials (SIE) exam and the Series 57. The SEC’s amendments to Exchange Act Rule 15b9-1 removed the proprietary-trading exclusion from Financial Industry Regulatory Authority (FINRA) membership, effective November 6, 2023, compliance date September 6, 2024 (Release No. 34-98202).

Methodology and sources

This analysis rests on primary documents. The enforcement narrative comes from the docket in Commodity Futures Trading Commission v. Traders Global Group Inc., No. 1:23-cv-11808 (D.N.J.), read on August 14, 2026: the preliminary-injunction opinion of November 14, 2023 (ECF No. 134), the Special Master’s Report and Recommendation of April 30, 2025 (ECF No. 258, public redacted version), the order adopting it of May 13, 2025 (ECF No. 260) and the fee opinion of July 11, 2025 (ECF No. 269). The registration analysis uses the CEA and 17 C.F.R. Part 5, FINRA Rule 1220 and the SEC’s adopting release for the Rule 15b9-1 amendments; the European material uses Directive 2014/65/EU (MiFID II) and section 21 of the Financial Services and Markets Act 2000. Scope: the United States, European Union, United Kingdom, Netherlands and Australia. One caveat — no appellate filing appears on the New Jersey docket, whose last entry is dated July 14, 2025.

Why most funded-account programmes fall outside the perimeter

Financial regulation is triggered by relationships, not by vocabulary. Almost every authorisation regime switches on when a firm does one of a small number of things: holds client money or assets, executes or arranges transactions for a client, deals as principal against a client in a regulated instrument, manages a portfolio, or advises. A conventional funded-account programme is built so that none of those descriptions fits.

A prop firm typically has no clients. The trader pays an evaluation fee for access to a challenge; that fee is consideration for a service, not a deposit, so there is no client money to segregate and no custody to supervise. The trader is not investing — there is nothing to redeem and no position in the trader’s name. The account is generally a demo environment on a licensed platform, so what appears on screen are price feeds rather than contracts. And the capital “allocated” is the firm’s own notional capital, which is precisely why the activity is called proprietary.

That is not a loophole so much as an absence. If no client money moves, no order is executed for a third party and no financial instrument is issued, most supervisory perimeters have nothing to grip. The honest description of the sector is a genuine regulatory gap rather than mass unlawfulness — which is a different question from whether individual firms trade fairly, publish their rules accurately, or pay what they promise. This site’s own cluster of more than 70 funded-account reviews repeatedly finds contractual problems that no licence would have prevented.

What does not follow is that an offshore company number tells a reader anything about supervision. That distinction is set out in our earlier analysis of the four regimes that look alike — registered is not regulated — and it is the sector’s most common misreading. A certificate of incorporation is a company-law document conferring no conduct obligations, no capital requirement, no client-money rule and no complaints route, as our survey of offshore FX licensing regimes sets out.

Comparing five perimeters across four jurisdictions

Jurisdiction / Regulator	Effective date	Scope	Key requirement	Penalty / sanction
US (CFTC / NFA)	CEA § 2(c)(2)(C) as amended by the Dodd-Frank Act, enacted July 21, 2010	Any firm acting as counterparty to a leveraged foreign-currency or retail commodity transaction with a non-ECP	Register as an RFED under 17 C.F.R. § 5.3(a)(6)(i); retail commodity transactions must be executed on a designated contract market per CEA § 4(a)	Civil monetary penalties and disgorgement; the CFTC pleaded roughly $300 million in potential liability in the Traders Global matter
US (SEC / FINRA)	Effective November 6, 2023; compliance date September 6, 2024	Registered brokers or dealers trading securities off an exchange of which they are a member — genuine equities prop desks	FINRA membership under amended Exchange Act Rule 15b9-1; individual traders register under FINRA Rule 1220(b)(4) after the SIE and Series 57	FINRA Rule 8310 sanctions up to expulsion of the firm and a bar for the individual
EU (MiFID II, national competent authorities)	Applied from January 3, 2018	Dealing on own account is an investment activity under Annex I, Section A(3) of Directive 2014/65/EU	Authorisation unless the firm falls within the own-account exemption in Article 2(1)(d), which is lost by market making, trading-venue membership or direct electronic access, high-frequency techniques, or dealing on own account when executing client orders	Administrative sanctions under Article 70 of MiFID II, set by each member state
UK (FCA)	FSMA 2000 in force from December 1, 2001	Any invitation or inducement to engage in investment activity communicated in the course of business	Section 21 FSMA: the promotion must be made or approved by an authorised person unless it concerns no controlled investment	Breach of section 21 is a criminal offence under section 25 FSMA, carrying up to two years’ imprisonment on indictment
Netherlands (AFM)	Warning published April 29, 2024	Firms soliciting Dutch consumers, whether or not licensed	Publication on the AFM’s boiler-room warning list, naming the domain and the support address	Reputational; the notice remains published and travels to payment providers and platforms

Sources: Commodity Exchange Act and 17 C.F.R. Part 5; SEC Release No. 34-98202; FINRA Rules 1220 and 8310; Directive 2014/65/EU; Financial Services and Markets Act 2000; Autoriteit Financiële Markten public warning of April 29, 2024. Last updated: August 14, 2026.

Where the perimeter does bite

The first and most dangerous hook is the CFTC’s. A funded-account programme becomes a regulated activity in the United States the moment the firm is the counterparty to a leveraged retail trade, and the trade need not be real in any economic sense. Section 2(c)(2)(C) of the Commodity Exchange Act asks two questions only: is the person on the other side an eligible contract participant, and is the transaction leveraged, margined or financed by the offeror. Neither mentions investment, custody or risk of loss. If the answers are “no” and “yes”, the firm is a retail foreign exchange dealer within 17 C.F.R. § 5.1(h)(1) and must register under Regulation 5.3(a)(6)(i). Where the underlying is a metal, an index or a digital asset, the parallel provision is Section 2(c)(2)(D), and Section 4(a) requires such retail commodity transactions to be executed on a designated contract market — so internalising them is itself the violation.

The second hook is the securities route — the one branch of prop trading that has always been regulated. A firm trading equities for its own account through a broker-dealer is inside the perimeter: its traders must pass the SIE and the Series 57 and register as Securities Trader Representatives under FINRA Rule 1220(b)(4), and the “first-loss capital contribution” arrangements common in that corner of the market are struck against a member firm subject to net capital and supervision rules. That perimeter widened rather than narrowed. The SEC’s amendments to Rule 15b9-1, adopted in Release No. 34-98202 and published in the Federal Register on September 7, 2023, deleted the proprietary-trading exclusion that had let exchange-member prop firms avoid FINRA membership, with a compliance date of September 6, 2024.

The third is MiFID II. Dealing on own account is an investment activity under Annex I, Section A(3) of Directive 2014/65/EU, and the own-account exemption in Article 2(1)(d) is conditional: it falls away if the firm makes markets, is a member of or participant in a trading venue, has direct electronic access to one, applies high-frequency techniques, or deals on own account while executing client orders. A challenge business that never touches a venue generally sits inside the exemption; one that routes flow to a venue, or starts executing participant orders, does not. The fourth hook is promotions and consumer law, which does not depend on a licence at all: section 21 of the Financial Services and Markets Act 2000 restricts inviting or inducing investment activity in the course of business, and unfair-commercial-practices law reaches misleading claims about payouts and “funding” whatever the firm’s status. The fifth is anti-money-laundering and payments, where obligations arrive indirectly through acquirers, payment institutions and any regulated affiliate — which is why processor de-risking is often the first consequence a firm actually feels.

Enforcement context: what My Forex Funds actually decided

The CFTC filed against Traders Global Group Inc., trading as My Forex Funds, and its chief executive Murtuza Kazmi on August 28, 2023, obtaining an ex parte statutory restraining order that froze the defendants’ assets. On November 14, 2023, after an evidentiary hearing, the court granted a preliminary injunction, finding the Commission had made a prima facie showing on every count — fraud under CEA § 4b(a)(2)(A) and (C), unregistered RFED activity, and off-exchange retail commodity transactions — and enjoining the defendants from “acting as a counterparty to customers in retail forex or retail commodity transactions.”

The defendants’ central argument was that nothing had happened. Substantially all trading was internalised in what their own counsel conceded was a “virtual simulated environment”; Robert Zink of Quinn Emanuel Urquhart & Sullivan told the court that participants “pass an evaluation program” and then “go to a simulator.” The court held that this made no difference to jurisdiction.

“Defendants argue that there were no ‘transactions’ because substantially all customer trading took place in a ‘simulated environment.’ The environment may have been simulated, but the trading was real. Customers placed orders, and Traders Global took the other side of them. When customers won, they were paid. When customers lost, their accounts were terminated and Traders Global kept their fees.”

— Zahid N. Quraishi, United States District Judge, District of New Jersey (Opinion, ECF No. 134, November 14, 2023)

That reasoning survives the case. The case itself did not. The defendants moved for sanctions on March 7, 2024, and the motion was referred to the Honourable Jose L. Linares, a retired district judge, as Special Master. His Report and Recommendation of April 30, 2025 found the Commission had put a false statement into the declaration supporting the ex parte freeze — CAD 31.5 million described as a “Transfer to unidentified Kazmi Account” that was in fact tax payments to the Canadian tax authority — relied on it for months, failed to correct it when flagged, and sponsored false testimony about when it learned of the error. The Special Master found the CFTC acted not merely negligently but willfully and in bad faith on several occasions.

“It cannot be the case that a federal enforcement agency can knowingly include a misrepresentation in an application for an ex parte SRO that freezes all of a defendant’s assets, rely on the misrepresentation for months, fail to correct or even acknowledge the misrepresentation when it is flagged by the defendant, sponsor false testimony as to when the agency learned of the misrepresentation, and then avoid sanctions merely because the agency belatedly files a corrected declaration.”

— Jose L. Linares, United States District Judge (retired), Special Master (Report and Recommendation, ECF No. 258, April 30, 2025)

Judge Edward S. Kiel adopted the recommendation on May 13, 2025, dismissed the complaint with prejudice and denied the defendants’ own motion to dismiss as moot. On July 11, 2025 he awarded the defendants $3,148,484.22 in fees and costs, noting the reasonableness of retaining experienced counsel against “a federal agency’s serious allegations of $300 million in potential liability”, and the docket was closed on July 14, 2025. Anyone still describing this matter in its 2023 terms is describing a case that no longer exists. Anyone reading the dismissal as a ruling that prop firms sit outside CFTC jurisdiction is also reading it wrong: the merits were never retried, and the November 2023 jurisdictional analysis was never disturbed.

Elsewhere, supervision has so far been expressed through warnings rather than rules. The Netherlands Authority for the Financial Markets (AFM) placed Infinity Forex Funds on its boiler-room warning list on April 29, 2024, naming the domain and support address; the firm has since gone, as our review of the closed programme records. At EU level, the European Securities and Markets Authority’s 2026 Common Supervisory Action on conflicts of interest reaches contract-for-difference brokers authorised under MiFID II and, by construction, leaves retail prop trading untouched.

What this means for firms, traders and compliance teams

For firms, the operative question is not whether they hold a licence but whether they are a counterparty. Any structure in which the firm profits when the participant loses and pays when the participant wins, on a leveraged price feed, is exposed to the Section 2(c)(2)(C) and 2(c)(2)(D) analysis regardless of how the account is labelled. The mitigations that work are structural: exclude US persons and enforce it at onboarding rather than in the terms; put genuine execution behind a regulated entity, as FTMO does through its ownership of a regulated broker; or move real capital to real accounts, as Topstep does after 30 winning days and Trade The Pool does with real stock fills. What does not work is a group in which a licensed broker sits alongside the prop desk without carrying its execution — the arrangement we found at Hantec Trader and Quant Tekel.

For compliance teams the documentation burden is specific: a written record of where each participant’s orders are executed and against whom; marketing that never uses “funded”, “live” or “real capital” to describe a demo environment; payout gates published before the fee is taken; and a position paper on why the firm falls within the MiFID II Article 2(1)(d) exemption if it operates into the EU. For traders, the checks take minutes: NFA BASIC and the CFTC’s registration check page for anything touching US futures or retail forex; FINRA BrokerCheck for a claimed broker-dealer; the FCA Financial Services Register for UK claims; ASIC’s registers for Australian ones. Two rules make them meaningful: search the entity named in the contract, not the brand on the website, and confirm the permission covers dealing with retail clients.

What is next: the forward view

Three things are genuinely unsettled. First, US enforcement appetite: the Traders Global outcome cost the Commission more than $3.1 million and a public finding of bad faith by a retired federal judge, which is a strong deterrent against another ex parte freeze on this theory, but it changes nothing in the statute and the November 2023 opinion remains available to any future plaintiff. Second, the EU: nothing in MiFID II requires authorisation of a firm that never touches a trading venue, and no proposal is pending to change that, so the perimeter question will more likely be answered by a national competent authority taking a view on a single firm than by legislation. Third, the promotions and consumer route, where movement is most likely because it needs no new perimeter — only a regulator willing to characterise “get funded” advertising as a misleading commercial practice. Expect the indirect channel to keep tightening: payment providers, app stores and ad platforms have repeatedly acted on warning lists faster than regulators have acted on firms.

FAQ

Are prop firms regulated?

Most retail funded-account firms are not, and not because they have evaded anything. Authorisation regimes attach to holding client money, executing client orders, dealing against clients in regulated instruments, managing portfolios or advising. A challenge fee is a service payment, the account is usually a demo environment and the capital is the firm’s own, so no trigger fires. A minority are regulated, because they run a real broker-dealer or futures business, or because a group affiliate holds a licence that genuinely carries the execution.

Which regulator can act against a prop firm?

In the United States, the CFTC where a firm is the counterparty to a leveraged retail forex or retail commodity transaction with a person who is not an eligible contract participant, under CEA § 2(c)(2)(C) and § 2(c)(2)(D), and the SEC and FINRA where an equities prop desk operates through a broker-dealer. In Europe, a national competent authority can act under MiFID II if the own-account exemption in Article 2(1)(d) is lost. Consumer-protection and advertising regulators can act without needing a financial perimeter at all.

Does a simulated account keep a firm out of scope?

Not in the United States. In CFTC v. Traders Global Group Inc. the District of New Jersey held on November 14, 2023 that “the environment may have been simulated, but the trading was real”, because customers placed orders, the firm took the other side, winners were paid and losers forfeited their fees. Section 2(c)(2)(C) of the Commodity Exchange Act requires neither an investment nor a risk of loss beyond the fee. Where a perimeter is drawn around financial instruments rather than counterparty relationships, a purely simulated account is a stronger defence.

Is the My Forex Funds case still running?

No. The complaint was dismissed with prejudice on May 13, 2025 as a sanction for the Commission’s own conduct, after a Special Master found it had put a false statement into the declaration supporting an ex parte asset freeze and failed to correct it. On July 11, 2025 the court awarded the defendants $3,148,484.22 in fees and costs against the CFTC, and the docket closed on July 14, 2025. The dismissal turned on prosecutorial conduct; the earlier jurisdictional findings were never overturned.

What qualifications does a regulated equities prop trader need?

Under FINRA Rule 1220(b)(4), anyone engaged in proprietary trading of equity, preferred or convertible debt securities otherwise than on a securities exchange, or directly supervising it, must register with FINRA as a Securities Trader. Since October 1, 2018 that means passing the Securities Industry Essentials examination and the Securities Trader qualification examination — the Series 57 — before or at the same time as registration. Persons primarily responsible for designing or supervising equity algorithmic strategies are covered too.

What should a trader check before paying a challenge fee?

Identify the legal entity in the terms and conditions, then search it — not the brand — on the relevant register: NFA BASIC and the CFTC’s registration check for US futures and retail forex, FINRA BrokerCheck for a claimed broker-dealer, the FCA Financial Services Register for UK claims, ASIC’s registers for Australian ones. Confirm the permission covers dealing with retail clients. Treat a company number, an offshore incorporation certificate or a “regulated group” claim as evidence of nothing.

This article is informational analysis only and does not constitute legal, regulatory, tax, or investment advice. Regulatory frameworks change frequently and interpretation depends on facts and circumstances; primary documents and official regulator guidance always supersede summaries. Firms should consult qualified legal counsel and their relevant supervisory authority before taking any action based on the analysis above.