Prop firm capital lockup - real SEC reg or no?

Discussion in 'Prop Firms' started by esc_trader, Oct 12, 2010.

  1. Hoping some folks can clear this up for me. For many years I've heard people emphatically state that the typical 1 year lockup of trader contribution is "SEC Regulations".
    What does this mean? There is some statute that a prop firm trader must have capital locked up for 1 year? I have some doubts.

    Prop mgrs please read this part before you jump:
    The justification for the lockup, insuring the prop firm against losses I totally understand and have no problem with per se.

    Although if traders had unions (interesting thought), it would be one of my gripes to management.
    I could understand the lockup and 1 yr time period for instance being the basis of justifying to the SEC that this is firm partnership and not typical retail trading - so SEC don't classify our traders as retail.
    However, I don't see this as the same thing as "SEC regulations", which to me means the SEC specifically in statutes does not allow the return of trader capital in less than a 12 month period (and to shut up about it there is no room for negotiation here - it is federal regulations).

    Anyone in the know please shed some light. Thanks.
  2. Maverick74


    It is an SEC regulation. The SEC has stated that if you are truly a "member" of an LLC then you are making an investment into that entity. You do not have a "segregated" or "individual account". Therefore there should be no reason for you to withdraw capital from the LLC like a personal checking account. This would make you a retail customer. If you are investing into an entity then that is exactly what they want you to do, make an investment into that entity.
  3. From my understanding of this "one year lock-up", it's part of SEC Rule 15c3-1.

    Apparently, if the registered firm does NOT hold the funds for one year, then the capital contribution from the trader is treated as a loan (and thus a liability) rather than as part of the firm's net capital for computational purposes. Therefore, most registered prop firms have this one-year lock up.
  4. It is an SEC regulation, but there is little scrutiny over the account. Some firms don't lock up because their $$ is held as the deposit and you are trading under a sub-account of theirs.

    A firm may have 100k deposited in their account and once you send over your capital deposit, they will create a sub-account for you. If you request your funds, they'll cut you a check from their account and then just recycle your account back into their main account.

    With a prop firm, you are more of a "member" making an investment into that organization. Nobody can scrutinize over who a firm can accept as a member or not, and those who are coming in are seen as making an investment in that firm.