The Financial Industry Regulatory Authority, or FINRA, implemented a rule today that raises the minimum margin requirement for leveraged ETFs and uncovered options overlying leveraged ETFs.

Leveraged ETFs began attracting increased scrutiny from regulators last year amid signs many investors didn’t understand the mechanics of daily compounding that such funds use. ProShares, the biggest purveyor of such ETFs, is facing a number of shareholder lawsuits. The Bethesda, Md.-based firm, vowing to vigorously defend itself, has said it’s disclosed all salient information in fund prospectuses.

Most traders who use leveraged ETFs don’t do so in margin accounts, according to Andy O’Rourke, director of marketing at Newton, Mass.-based Direxion, a purveyor of geared ETFs that mostly offers investors triple the exposure to its underlying indexes.

“In general, the margin requirements have increased by a factor commensurate with the leverage of the ETF or underlying ETF in the case of an option,” the FINRA notice, dated November 2009, said. FINRA was created in July 2007 through the consolidation of the National Association of Securities Dealers and the various regulatory, enforcement and arbitration functions of the New York Stock Exchange.

Pay To Play

The FINRA rule builds on NASD Rule 2520, which existed before FINRA’s creation and increased minimum margin requirements on market participants defined as “pattern day traders.” The NASD defined a pattern day trader as someone who buys and sells the same security on the same day, and executes four or more such trades in five consecutive trading sessions.

Under Rule 2520, such traders using margin accounts were required to put up a daily maintenance requirement of $25,000. With the new FINRA rule, that amount gets multiplied by the same factor of magnification of returns that a particular leveraged ETF uses, according to a notice on the rule FINRA circulated in September 2009.

For example, pattern day traders in margin accounts using ProShares funds that multiply returns by a factor of 2 would have a $50,000 minimum daily maintenance requirement. Such traders favoring Direxion triple-exposure funds would have a $75,000 minimum daily maintenance requirement.

FINRA had previously planned to implement the new rule in December 2009.