| 18 August 2009

An investor alert just came across the BNB wires this morning providing an interesting twist to an already saucy story. Turns out both FINRA and the SEC have joined forces on this one to warn investors about the potential dangers of leveraged and inverse ETFs.

We've been following this story closely and have wondered aloud when a more substantial warning would supplant the subtle suggestions made by FINRA earlier this summer (which they subsequently backpeddled on almost immediately.) Fund companies have pressured FINRA to ease up on the warnings so it should be no surprise that their big brother, the SEC, tags along on this particular finger-wagging. 

The initial FINRA warnings focused on suitability and whether brokers were adequately explaining the products to their clients. As a result,  Edward Jones, Ameriprise (AMP), LPL Holdings and UBS Wealth Management (UBS) all stopped selling the products. Charles Schwab Corp. (SCHW) and Fidelity Investments issued warnings to clients, but continued to sell them.

To be clear, the new warning issued today falls short of an actual danger manifesto and instead sounds a bit more like a CYA memo issued by the regulators. Leveraged ETFs are explained and suitability is covered, yet again. But it will gain attention and it's better than complacency and implicit approval through no action.

In the joint statement, FINRA and the SEC advised investors to, "consider leveraged and inverse ETFs only if they are confident the product can help meet their investment objectives and they are knowledgeable about and comfortable with the risks associated with these specialized ETFs."

The release placed emphasis on buying products only after discussing objectives with an investment professional. "Because these products are complex and can be confusing, investors should consider seeking the advice of an investment professional who understands these products, can explain whether or how they fit with the individual investor's objectives, and who is willing to monitor the specialized ETF's performance for his or her customers."

In addition to the statement, FINRA issued an alert directly to investors. The alert walks through a description of leveraged and inverse ETFs and offers up a few "real-life" examples and possible outcomes.

We issued similar educational tips to investors several months ago on Learning Markets, including both the dangers and the opportunities.

The move is likely to sting leveraged ETF providers like Direxion, proud manufacturer of some of the most widely traded securities in the markets today, such as the Direxion 3x Bear (FAZ) and Bull (FAS).