The Prop Firm’s “Trust Cliff”: Proving “Arbitrariness” Required of CCOs after the MFF Incident

The essence of the MFF incident is not the victory or defeat in litigation with regulatory authorities. The real risk is being suspected of “arbitrary intervention” by the trader community and losing trust ¹. This article analyzes this new compliance challenge faced by prop firms and proposes a framework of “technical audit trails and human final judgment” ¹ necessary for CCOs to actively prove “fairness.”

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1. The Paradoxical Lesson of the MFF Incident: “Court Victory” and “Market Defeat”

1.1. 2. Legal Implications of the Dismissal of the Lawsuit in May 2025

In May 2025, the lawsuit filed by the U.S. Commodity Futures Trading Commission (CFTC) against prop trading firm My Forex Funds (MFF) was dismissed by a U.S. Federal Court ². This may appear to be a victory for MFF and the prop firm industry at first glance.

However, this legal judgment does not, in any way, endorse the legality or ethics of MFF’s business model. The decisive reason for the dismissal of the lawsuit was not because MFF’s innocence was proven, but solely because the court recognized the CFTC’s “serious procedural deficiencies” and “malicious misrepresentations” ⁵.

According to the investigation by the Special Master, the CFTC intentionally concealed for more than six months and continued to make false representations to the court, despite having obtained decisive exculpatory evidence from the Ontario Securities Commission (OSC) in the form of an email confirming that remittances by MFF were legitimate tax payments ⁴. This rare “bad faith” ⁵ on the part of the regulatory authority led to the unusual situation of the lawsuit itself being dismissed.

1.2. The “Roadmap of Suspicion” that Was Dismissed but not Erased

Although the legal proceedings have been suspended, the damage that the CFTC’s initial complaint ², filed in August 2023, inflicted on the industry has not been resolved in any way. Rather, this complaint continues to function as a “roadmap of suspicion” for the trader community, competitors, and (albeit unsuccessfully this time) other regulatory authorities to exploit the vulnerabilities of the prop firm business model.

The core allegations pointed out in the complaint—namely, the suspicion that many traders were actually trading in a demo environment rather than with real money ², the suspicion that the firm itself was functioning as a counterparty in conflict of interest with its clients ², and the suspicion that arbitrary interventions such as “artificial slippage” and “hidden fees” were carried out to impede the profits of successful traders ²—remain in the public domain as allegations because they were not adjudicated in court.

The greatest “achievement” of the MFF incident does not lie in the CFTC’s failure to enforce the law. It lies in dragging the previously opaque internal operations ⁸ of prop firms into the arena of public discussion and transforming the fundamental distrust ⁸ of the industry—”Isn’t the firm profiting from the traders’ losses?” ⁹—into a common understanding throughout the community.

1.3. The “Trust Cliff” Faced by CCOs

As a result, the entire prop firm industry is facing a serious “Trust Cliff” ¹.

Aside from the risk of future regulatory tightening ¹⁰, the greatest management risk at present is the loss of trust from the trader community, which is the customer and the bearer of the firm’s reputation.

Since the MFF incident, if a trader is disqualified for violating the firm’s rules (e.g., maximum drawdown, prohibited trading strategies, lot size restrictions, etc. ¹²), even if that disqualification process is 100% justified under the rules, it has become viewed with suspicion by the trader as an MFF-style “arbitrary intervention” or “unfair manipulation” ⁹.

2. The New Burden of Proof for CCOs (Chief Compliance Officers): Actively Proving “Arbitrariness”

2.1. The Heavy Responsibility of Proving “Fair Disqualification”

At the forefront of this “trust cliff,” caught between the harsh gaze of traders and the risk management demands of management, is the CCO (Chief Compliance Officer).

Prior to the MFF incident, the CCO’s primary responsibility was to ensure that traders complied with internal rules (such as drawdown limits, prohibition of using prohibited EAs, and prohibition of copy trading ¹³). However, the CCO’s new responsibility after the MFF incident has shifted to actively proving to skeptical traders and potential regulators that the rule enforcement process was “not arbitrary,” that is, that it was “fair.”

The essence of a prop firm’s “challenge” is not so much a test of profit-seeking ability as it is a test of “risk discipline” under strict rules ¹⁵. The process of determining this violation of discipline and declaring disqualification is now the greatest compliance risk affecting the firm’s credibility.

2.2. Increasing Personal Liability of CCOs

This burden of proof is not limited to legal or reputational risks. It is a risk of “Personal Liability” that directly threatens the CCO’s individual career.

In recent years, financial regulators such as the SEC (U.S. Securities and Exchange Commission) and CFTC have been markedly increasing their tendency to pursue the personal liability of CCOs for deficiencies or failures in corporate compliance programs ¹⁶.

The case where Binance’s CCO was fined a huge sum for actively instructing the evasion of AML (anti-money laundering) regulations ¹⁶ is a case of intentional misconduct. However, more serious for CCOs are other enforcement cases by the SEC ¹⁷. There, individuals are punished even for unintentional “omissions” or “deficiencies in audit trails,” such as “failure to demonstrate that an appropriate annual review was conducted” or “creation or modification of forms that had not been previously created during the SEC’s review.”

2.3. The “Audit Trail Dilemma” in which CCOs Fall

CCOs are caught between claims from traders that “the disqualification was unfair” ⁹ and audit requests from regulators to “show evidence that the process was fair” ¹⁷.

At this time, the conventional monitoring systems on which CCOs rely (e.g., rule-based violation detection tools ¹) are decisively insufficient to fulfill this new burden of proof. This is because, while those systems can record the “fact of the violation (Log),” they are not designed to objectively explain and prove “why it is not an arbitrary intervention or manipulation (Proof of Fairness).”

The “audit trail dilemma” is precisely the background to the fatal mistake of “creating evidence later” by the CCO in the SEC’s enforcement case ¹⁷. In other words, the compliance process should have been executed, but the technical means to prove it “in an unalterable form” and “objectively” were lacking.

3. Proposal: A Framework of “Technical Audit Trails” and “Human Final Judgment”

3.1. The Only Solution to Eliminate “Arbitrariness”

The way for CCOs to resolve this dilemma and dispel suspicions of “arbitrariness” is neither to conceal technical processes nor to strengthen the CCO’s discretion.

It is to introduce a compliance framework that strictly separates and links “Technical Evidence,” designed to eliminate “arbitrariness,” and “Human Final Judgment,” to fulfill accountability ¹.

In this framework, the CCO’s role transforms from “a person who makes discretionary judgments” to “a person who approves the objective evidence presented by technology and records the act of approval itself as an audit trail.”

3.2. Three Legal and Technical Requirements for “Technical Audit Trails”

The “technical audit trails” on which CCOs rely as the basis for their judgments must not be mere operational logs. They must meet the following three requirements to withstand admissibility in court and rigorous audits by regulatory authorities.

1. Legal Admissibility (Foundation): “Immutability” that can legally prove “when” the audit trail was created and that it has not been tampered with by “anyone.”
2. High Detection Capability (Spear): “Objectivity” that can detect not only superficial rule violations but also hidden fraud (e.g., sophisticated copy trading).
3. Explainability (Shield): “Transparency” that can explain “why” it was detected in a way that humans (CCOs, regulatory authorities, traders) can understand.

4. Requirement (1): Building an “Immutable SRE Infrastructure” with Legal Admissibility

4.1. SEC Rule 17a-4(F) (Amended 2023): the Gospel of “Audit Trail Alternative”

For prop firms operating (especially in the U.S. market), the electronic record-keeping requirements equivalent to those for broker-dealers make SEC Rule 17a-4(f) the de facto global standard ¹⁸.

Traditionally, this rule has strictly required storage on “WORM (Write Once, Read Many)” media, i.e., media that cannot be physically or logically altered or erased once written ²¹. This was a rigid requirement that did not fit with modern, flexible cloud architectures.

However, the historic amendment ²², adopted in 2022 and with a compliance deadline of May 3, 2023, formally recognized the “Audit Trail Alternative” approach as an alternative to WORM ²¹.

This amendment is the biggest tailwind for modern RegTech solutions. CCOs are no longer bound by physical WORM and can now use cloud-native systems ¹⁸. However, as a strict condition, the system must maintain a “complete audit trail that tracks all record creation, modification, and deletion” with a timestamp ²¹ and be able to recreate the original record at any time.

This makes it technically impossible for the CCO to “tamper with evidence,” which was the problem in ¹⁷ (if tampering occurs, the tampering log itself remains as an unalterable audit trail), and provides a legal basis for freeing the CCO from the “audit trail dilemma” ¹.

4.2. IETF RFC3161: Temporal Immutability through “Proof of Existence at a Point in Time”

While SEC 17a-4 requires “Integrity” of records, admissibility in court asks “when did that record exist (Time)?”

IETF RFC3161 ²⁶ is the international standard for this “Trusted Timestamping.” It defines a process in which a trusted third-party authority (TSA: Time Stamping Authority) affixes an encrypted timestamp to data (or its hash value) ²⁷.

This makes it cryptographically impossible for even the prop firm itself, the owner of the data, to change the timestamp later or backdate it ²⁸. When a trader claims “I didn’t violate it now” or “The evidence was fabricated later,” the CCO can objectively and legally rebut, “This violation record has been proven to exist by a trusted third-party TSA at YYYY/MM/DD HH:MM:SS.” This is an essential legal defense in dispelling suspicions of “arbitrariness” after the MFF incident ¹.

4.3. SOC 2: Human Immutability through “Access Audits”

Even if the record itself is immutable (SEC 17a-4) and the time is immutable (RFC3161), the last remaining doubt is “Who accessed that record?”

SOC 2 (Systems and Organization Controls 2) is an auditing standard for internal controls related to the security, availability, and processing integrity of service organizations, established by the AICPA (American Institute of Certified Public Accountants) ²⁹.

The value of SOC 2 compliance for CCOs is that everything—”who, when, accessed which audit trail data (trader’s violation records and CCO’s approval logs), and what they saw”—is rigorously recorded in a process ³² verified by independent auditors ¹. This allows the CCO to prove “I (or other employees) did not unfairly access, view, or modify this data outside of the prescribed approval process,” i.e., the fairness of human processes.

[Table 1] Regulatory Compliance Crosswalk for CCOs

¹

Regulatory Requirements	Legal and Technical Challenges	Response Functions Using Immutable SRE Infrastructure (AI MQL SOW Compliant)
SEC 17a-4(f) (US)	Originality and Reproducibility of Electronic Records (Alternative to WORM)	Audit Trail Alternative 21. Records all changes and deletions and ensures reproducibility of the original.
FINRA (US)	Record Retention Period (CAT-related, etc.) [22]	Parametric Retention Period 1. Variable settings according to regulatory requirements (e.g., 3 years, 6 years).
MiFID II (EU)	Durable Medium and Retention Period (e.g., 7 years)	Audit Trail Alternative (meets durable medium requirements) + Parametric Retention Period 1.
General Legal (Global)	“Proof of Existence at a Point in Time” of Audit Trails	Affixing IETF RFC3161-compliant TSA timestamps [26, 27]. Proves the impossibility of backdating.
SOC 2 (Audit)	Access Audit of Audit Trail Data 32	SOC 2-compliant access audit logs 1. Complete tracking of “who,” “when,” and “what they saw.”
GDPR / ePrivacy (EU/UK)	Acquisition of Personal Data Such as Device Fingerprints	Clear Consent UI (Legal Consent Template) 1. Explicit statement of data acquisition purpose (fraud detection) and obtaining consent.

5. Requirements (2) and (3): “GenAI Causal Fingerprint (Spear)” and “XAI Investigation Briefing (Shield)”

5.1. “Spear”: “GenAI Causal Fingerprint Analysis” that Goes beyond Rule-Based Systems

On top of a solid legal foundation (SRE), the next question is “what” to detect.

“Rule-based” detection (e.g., News Gap Trading, HFT ¹) like that offered by traditional competitors has become commoditized and is vulnerable to rebuttals from traders that “it’s an arbitrary rule application.”

Truly “arbitrariness”-free detection is objective evidence based on “behavioral patterns” rather than superficial rules. The “GenAI Causal Fingerprint Analysis” ¹ in the framework proposed in this paper analyzes not whether individual transactions violate rules, but “whether the trader’s behavioral pattern has a statistically causal relationship with the ‘fingerprint’ of hidden copy trading groups or specific EAs (automated trading systems)” ¹.

5.2. Avoiding “False Disqualification”: Counterfactual Validation to Eliminate AI “Arbitrariness”

However, simply introducing AI only replaces “human arbitrariness” with “AI arbitrariness (black box).” In order for CCOs to be accountable to regulatory authorities and traders, active proof that “AI’s judgment is not arbitrary” is essential.

To eliminate this “AI arbitrariness,” advanced detection logic should be equipped with “Counterfactual Validation” as standard ¹.

This is a process that automatically executes stress tests on the correlation detected by AI (e.g., the transactions of Mr. A and Mr. B are similar), such as “Is the correlation maintained even if the analysis time window (Window Size) is shifted?” or “Does the correlation break down if a time difference (Lead-Lag) is intentionally added?” ¹.

As a result, the report that the CCO receives is not an ambiguous “correlation detected,” but a much stronger (i.e., arbitrariness-free) audit trail that “the correlation did not break down even with counterfactual validation, and the possibility of a chance coincidence was statistically rejected” ¹.

5.3. “Shield”: Collaboration between XAI and “Human Final Judgment”

The tool for CCOs to fulfill accountability for this advanced detection (spear) is the “Shield (XAI Shield)” ¹. This functions as an “LLM-assisted investigation briefing” that presents the AI’s detection results in a way that humans can understand ¹.

This completes the compliance framework proposed in this paper.

1. AI’s Role (Spear): “GenAI Causal Fingerprint” detects abnormal behavioral patterns ¹.
2. AI’s Role (Shield): “LLM” collects and analyzes relevant data (including the results of counterfactual validation) and presents an “investigation briefing (draft)” to the CCO in natural language ¹.
3. Human’s Role (CCO): The CCO reviews the “Auxiliary View” created by AI and the raw data collected ¹.
4. Human’s Role (CCO): The CCO makes the final compliance judgment (=disqualification/warning/acquittal) and “approves (signs)” it on the system ¹.
5. Infrastructure’s Role (SRE): The act of “approval (signature) by the CCO” itself is recorded as an unchangeable “final audit trail” by the “Immutable SRE Infrastructure” (SEC 17a-4, RFC3161, SOC 2 compliant) ¹.

6. Conclusion: CCOs Govern “Technology” and Rebuild Trust

The “trust cliff” ¹ in the prop firm industry, exposed by the MFF incident, has not been resolved in any way by the dismissal of the lawsuit ². Rather, the trader’s suspicions ⁹ and regulatory authorities’ monitoring ⁷ are higher than ever because the matter was not settled in court.

Under this new market environment, the heavy burden of proof of “proving arbitrariness” ¹⁶ imposed on CCOs can no longer be fulfilled by conventional rule-based systems or manual processes that cannot leave audit trails.

The only way for CCOs to dispel suspicions of “arbitrary intervention” and rebuild trust from both the trader community and regulatory authorities is not to conceal technology, but to govern it.

This can only be achieved by introducing a strict framework of “technical audit trails” (audit trails with legal admissibility, advanced detection, and explainability) and “human final judgment” (an approval process executed by the CCO himself, the act of which becomes an audit trail) ¹, and actively ensuring accountability and transparency.

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