The Financial Industry Regulatory Authority, which helps to govern how brokers and advisers work with their clients, has apparently reversed course on its crackdown of leveraged exchange-traded funds.

At the very least, new statements by FINRA released on its latest podcast seem to indicate that regulators are willing to take a broader view of holding periods advisers can suggest to clients with leveraged and inverse ETFs.

On the FINRA Web site, regulators are now saying: "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."

Last month, FINRA issued a notice warning advisers about the possible dangers of such financial instruments. (See notice here.) The regulatory body basically said that fiduciaries are failing to do their duties if they recommend that clients hold an inverse or leveraged ETF for periods longer than a day.

"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," said FINRA in June.

Separately, the big brokerage firm Edward Jones is now saying that it will drop use of leveraged ETFs for its largely retail base of customers. (See more details in today's news roundup here.)

But to be fair, throughout the early phases of the emergence of leveraged and inverse ETFs – particularly those providing 200% and 300% (2x and 3x) exposure to their underlying benchmarks) – sponsors have gone to great lengths to make sure that advisers and self-directed individuals understand such instruments are made for traders. They've made a point when launching new products as well as at their Web sites emphasizing that leveraged ETFs aren't suitable for most long-term oriented investors implementing buy and hold strategies.

And immediately following last month's warnings by FINRA, managers at both ProShares and Direxion uniformly said they welcomed such actions as a means to help get out word on proper uses of leveraged ETFs.

But they’ve also been privately pressing regulators about such broad statements regarding holding leveraged ETFs for more than a day.

That has been a point of contention – how well leveraged 2x and 3x leveraged ETFs – for a number of industry observers. It perhaps first became an issue when credit markets came to a virtual halt last year and markets nearly went over a cliff.

As reported here and elsewhere, ETFs designed to provide daily leverage suffered greatly during the last recession. That has led to several in-depth reviews of the issue, one of which was done by our own Heather Bell. (See story here.)

But initial reports of disruptions in the marketplace with leveraged ETFs started showing up last winter. In one of the earliest alerts to investors, IndexUniverse.com columnist Anthony Welch wrote about the trials and tribulations he was having using leveraged ETFs in the wake of severe market volatility following the collapse of Lehman Brothers.

He noted that on Nov. 6 the S&P 500 was down 3% at midday. At the same time, the UltraShort S&P 500 ProShares (AMEX: SDS) was up 6.6%. (See story here.)

“That's odd, since the ETF is designed to provide 200% short exposure to its benchmark. That means it should be up 6%, at least in theory,” said Welch, who serves as a portfolio manager at Sarasota Capital Strategies, who also noted in the column that he was seeing gaps of 300 basis points between certain leveraged ETFs and how they should’ve been performing.

The warnings by FINRA last month also included observations of leveraged ETFs that had shown skewed results when compared to their underlying indexes. But much research is being directed at the issue. (An excellent paper on the topic by a trio of distinguished economists, “Long-Term Performance Of Leveraged ETFs,” can be found here.)

In its new statements on the topic, FINRA is stressing that while advisers can reasonably recommend that clients can use leveraged ETFs for longer than a day, they essentially should provide some sort of individualized assessment of how such a position could impact that investor in the future if held for an extended period.

At IndexUniverse.com, a Webinar looking at who should and should not be thinking of using leveraged ETFs – and a detailed discussion of how they work – can be found in the Webinar archives section. It was first presented as a way for advisers to consider how to responsibly decide whether it’s smart to recommend such vehicles to clients. (You can find our Webinar archives here.)

Advisers have likely not heard the last of FINRA on leveraged ETFs. These products, particularly the newest offering 2x and 3x exposure, continue to evolve.

Another wrinkle in the ongoing development of leveraged ETFs is plans by Direxion to come out with a full-line of juiced-up funds that seek to provide monthly returns, rather than daily, of benchmark performances. (See related story here.)