1. Frequently Asked Questions
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2. The shares of an ETF commonly represent an interest in a
portfolio of securities that track an underlying benchmark or
index. A leveraged ETF generally seeks to deliver
multiples of the daily performance of the index or benchmark
that it tracks. An inverse ETF generally seeks to deliver
the opposite of the daily performance of the index or
benchmark that it tracks. Inverse ETFs often are marketed
as a way for investors to profit from, or at least leverage their
exposure to downward-moving markets. Some ETFs are a
combination of both such that they seek a return which is a
multiple of the inverse performance of the underlying index.
In order to achieve these objectives, leveraged and inverse
ETFs use a range of investments strategies like swaps,
futures contracts and other forms of derivative instruments.
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3. Most leveraged ETFs and inverse ETFs reset everyday this
means that they are meant to achieve their stated objective
on a daily basis. Due to the effects of compounding overtime
the results can differ significantly from their stated objective.
As they reset each day, leveraged and inverse ETFs are
generally inappropriate for those investors with intermediate
or long-term investment horizons. They may be appropriate
if they are a part of a sophisticated trading or hedging
strategy that will be closely monitored by a financial
professional. At times such strategies might justify a decision
to hold a leveraged or inverse ETFs longer than one day.
However, a registered representative should carefully
address the question of how to engage in these strategies in
a manner that confirms to the suitability rule.
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4. NASD Rule 2310 requires that prior to recommending the purchase, sale
or exchange of a security, a brokerage firm must have a reasonable basis
for believing that the transaction is suitable to the customer to whom it is
being recommended.
This determination requires two steps. The first step requires a
determination if the product is suitable for any customer. The firm
offering the investment must fully understand the products and
transactions that it will recommend. It must understand all the terms and
features of the investment. For leveraged ETFs or inverse ETFs, these
questions include considerations of how the fund is designed to perform,
how it achieves that objective, the impact on performance from market
volatility, the use of leverage and the appropriate holding period.
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5. Once a firm is satisfied that a product is generally
suited for at least some investors, a customer
suitability analysis must be done. With it a firm must
determine if the product is suitable for specific
customers to whom it may be recommended. Such
analysis includes making reasonable efforts to get
information on the customer’s financial and tax
status as well as his investment objectives and other
information which may assist in determining his
suitability.
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6. The securities industry regulators have taken the
position that leveraged and inverse ETFs are
likely unsuitable for retail customers, and firms
that choose to recommend them must carefully
consider their suitability for each customer.
Given the peculiar properties of the reset feature
it is important that these ETFs are offered as a
part of an intermediate or long-term investment
rather than as part of a closely monitored
trading or hedging strategy.
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7. Some mutual funds are leveraged or inverse – they
are made to deliver multiples or the inverse of the
performance of the index or the benchmark that
they track. Funds like these reset daily and may
present many of the same issues present
in leveraged and inverse ETFs, and should thus be
also subject to the same level of scrutiny.
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8. Investors may call (888-998-0520) or email us
for a free evaluation of their case.
You can learn more about ETF sales practices
by visiting our website
www.securitieslitigators.com
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9. Alan L. Rosca
Leader Building, Ste. 1255
526 Superior Avenue
Cleveland, OH 44114
Phone: 888-998-0520
arosca@prwlegal.com
www.securitieslitigators.c
om/alan-l-rosca
Joseph C. Peiffer
201 St. Charles Avenue
Suite 4610
New Orleans, LA 70170
Phone: 504-586-5259
jpeiffer@prwlegal.com
www.securitieslitigators.c
om/joseph-c-peiffer
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10. Important Disclosures
This disclaimer contains important information about this presentation. Please read it carefully.
This presentation has general information about FINRA arbitration process and our firm, but
it is not legal advice. We are not offering to provide you with legal representation through this
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Attorney Joe Peiffer’s office is in New Orleans. He is licensed to practice law in Louisiana.
Alan Rosca's office is in Cleveland. He is licensed to practice law in Ohio. We handle financial fraud
cases in most states. However, our firm's lawyers are not admitted to practice law in every state. In
those jurisdictions in which we are not admitted to practice, we will associate with local co-counsel to
assist with the matter, at no additional cost to our clients, whenever permitted or required by the
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The descriptions of our lawyers` and our firm's areas of practice do not state or imply that
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