PROPRIETARY TRADING AGREEMENT - COMPREHENSIVE

PREAMBLE - PROPRIETARY TRADING AGREEMENT

This Proprietary Trading Agreement (PTA) effective [Date] between [Prop Trading Firm] (Firm) and [Professional Trader] (Trader) governs access to proprietary trading capital and profit/loss allocation. Legal Framework: Securities Exchange Act §15(c) (Fraud in securities), IRC §1401 (Self-Employment Income), Investment Advisers Act §80a-1, §80a-3 (Regulation).

1.1 Capital Allocation (FIRM'S MONEY): Per SEC Rule 10b-5 (Fairness):
• Allocated Trading Capital: USD [X,XXX] per Trader per account
• Capital Source: Firm's proprietary funds (not customer deposits) per §78o
• Account Ownership: All accounts remain in Firm's name per §80a-3(c)
• Leverage Available: 1:[X] maximum per 17 CFR §240.15c3-1 (Net capital requirements)
1.2 Risk Limits (MANDATORY COMPLIANCE): Per SEC Regulation SHO (Short Sale):
• Daily Risk Limit: [2% / 3%] of allocated capital maximum loss per day per §78o
• Maximum Drawdown (Stop Loss): [10% / 15% / 20%] of capital monthly—triggers account reset per 17 CFR §240.10b-5
• Single Position Limit: [5% / 10%] of capital maximum per position per IRC §1401 (Trader tax treatment)
• Restricted Products: [No penny stocks / No leveraged ETFs / No naked shorts / No cryptocurrencies] per firm policy per SEC Regulation SHO

2.1 Profit-Sharing Split (TRADER vs. FIRM): Per IRC §1401 (Self-employed income):
• Gross Profits Allocation: [50% / 60% / 70%] to Trader / [30% / 40% / 50%] to Firm per IRC §1401(a)
• Floor: Minimum monthly profit threshold USD [X,XXX] before any payout per IRC §1401
• Example: If gross profit = USD 10,000 → Trader: USD 5,000-7,000 | Firm: USD 3,000-5,000
2.2 Loss Allocation (ASYMMETRIC - FIRM BEARS RISK): Per IRC §1401(b):
• Monthly Losses: Firm absorbs all losses (Trader does NOT pay back losses) per [agreement clause]
• Trader Risk: Limited to forfeiture of trading privileges (no financial liability) per IRC §1401(c)
• Maximum Monthly Loss: Drawdown [10%] = account reset (restart capital next month) per 17 CFR §240.15c3-1
2.3 Breakeven & Reset Mechanisms: Per IRC §1401(a):
• Breakeven Points (Restart): After [X days / X weeks] at breakeven, account resets with fresh capital per firm policy
• Rolling Resets: If cumulative loss reaches [20%], monthly reset with [50% / 75%] capital restoration per IRC §1401

3.1 Subscription/Monthly Fees (FIRM'S COST): Per IRC §1401 (Income treatment):
• Monthly/Quarterly Subscription: USD [X,XXX] per month OR [X%] of capital allocated per §1401(a)
• Payment Schedule: Due [monthly in advance / upon joining]
• Covers: Trading platform access, real-time data, tech support per Securities Exchange Act §15(j)
3.2 Performance Fees & Bonuses (TAX IMPLICATIONS): Per IRC §1401(c)(1):
• Performance Bonus: USD [X] or [X%] of monthly profits (on top of profit split) if P&L >USD [X,XXX]
• Annual Bonus: [Discretionary / Discretionary with criteria] based on annual performance per §1401
• Tech Fee: USD [X]/month for platform/data/broker commissions per SEC §78o
3.3 Trader Pays NOTHING for Losses (Zero Recourse): Per IRC §1401(b):
• Losses: Entirely borne by Firm per §1401(b)
• No margin calls against Trader per 17 CFR §240.15c3-1

4.1 Prohibited Strategies (COMPLIANCE - MANDATORY): Per SEC Regulation SHO (Short Sale):
✗ Algorithmic Trading/Expert Advisors (EAs): PROHIBITED without written pre-approval from Firm per §78o
✗ Naked Short Selling: PROHIBITED per Regulation SHO Rule 200
✗ News Trading (High Volatility Events): [Prohibited / Restricted to X hours] per §78o
✗ Overnight Positions: [Prohibited / Max USD X exposure] per firm policy per 17 CFR §240.10b-5
✗ Correlated Positions: >2 positions in same sector = prohibited per SEC §78j
4.2 Mandatory Reporting & Documentation: Per IRC §1401 (Records):
✓ Daily Trading Logs: All trades must be documented (time, symbol, volume, P&L) per §1401
✓ Strategy Documentation: Written description of trading strategy (required for account opening) per §78o
✓ Monthly Performance Reports: Trader provides P&L, win rate, R:R ratio per IRC §1401
✓ Compliance Audits: Firm conducts monthly trading audits per SEC §78o

5.1 Initial Qualification (AUDITION PROCESS): Per Investment Advisers Act §80a-1:
• Demo Trading: Minimum [2 / 4 weeks] simulated trading before live capital access per §80a-1
• Performance Threshold: [+5% / +10%] profit (or break-even acceptable) in demo to qualify per firm policy
• Consistency Check: Stable win rate >40% to progress to live account per §80a-1
5.2 Ongoing Performance Review: Per IRC §1401(a):
• Weekly Reviews: Performance metrics reviewed every [Monday / Friday] per §1401
• Monthly Coaching: [1 / 2] one-on-one sessions per month (market analysis, strategy review) per firm policy
• Performance-Based Suspension: [3 months] of drawdown >losses = account suspension/termination per §1401

6.1 Termination Notice (EITHER PARTY): Per SEC §78o (Termination rights):
• Notice Period: [7 / 14 / 30 days] written notice to terminate relationship per §78o
• Immediate Termination: For breach (rule violations, fraud, undisclosed trading) per §78o
6.2 Account Settlement & Payout: Per IRC §1401(a):
• Final P&L Calculation: All open positions liquidated at market price at close of business on termination date per §1401
• Payout Schedule: Trader's share of profits paid within [5 / 10 business days] after close per §1401
• Reinstatement: Trader may reapply after [1 / 3 / 6 months] (demo trading again) per firm policy per §1401

7.1 Trader Tax Classification (CRITICAL): Per IRC §1401 (Self-Employment Income):
• Independent Contractor: Trader is NOT employee (no W-2, no benefits) per §1401(a)
• Income Reporting: 1099-MISC (for Trader's share of profits) per §1401(b)
• Self-Employment Tax: Trader pays SE tax on profit share per IRC §1401(a) & (b)
• Deductible Expenses: Trading fees, platform costs (if not covered by Firm) are trader-deductible per IRC §162
7.2 Marks to Market Election (OPTIONAL): Per IRC §475 (Mark-to-market):
• Trader may elect Mark-to-Market treatment for tax efficiency per §475(f)(1)
• Effect: Capital gains taxed as ordinary income (potentially lower rate) per §475(f)

Applicable Law: [New York / Delaware / California / US Federal] | Disputes: [Binding Arbitration / FINRA arbitration] per SEC §78o