| 28 July 2009

Since we published our story on the ETF flap, it's been brought to our attention that FINRA is backpeddling a bit on its earlier warnings. It may come as no surprise, however, that we learned of these changes through a Direxion Funds press release.

What FINRA is saying now:
"Leveraged and inverse ETFs can be appropriate if recommended as part of a sophisticated trading strategy that will be closely monitored by a financial professional. At times, this trading strategy might require a leveraged or inverse ETF to be held longer than one day."

What FINRA said in June:
"While the customer-specific suitability analysis depends on the investor’s particular circumstances, inverse and leveraged ETFs typically are not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets."

Recall that FINRA has a very conflicted role in all of this. They like to bill themselves as advocates for the investors, and we certainly see that in some of their regulatory actions. But the industry is, for all intents and purposes, self-regulated.

So FINRA needs to play nice with firms because it's the firms that support FINRA, not the fines. FINRA collected roughly $28 million in fines last year and $779 million in "regulatory fees" from investment firms. 

By the way, to be fair to FINRA, we listened to their podcast, and here's a statement they made that was conveniently NOT highlighted by Direxion Funds in their press release:

"While it is not FINRA's position that all leveraged and inverse ETFs are unsuitable for all retail customers, firms that recommend them just carefully consider their suitability for each customer. Of particular concern, in light of their reset feature, is whether one is recommended as either an intermediate or long-term investment rather than as part of a sophisitcated trading strategy to hedge market exposure."