Leveraged Exchange-Traded Funds ("ETFs") and the Artificial Intelligence ("AI") Chip Selloff: When Regulation Best Interest ("Reg BI") and Misrepresentation Claims May Apply

dluma9

Oct 28

5 min read

Retail investors have piled into leveraged exchange-traded funds ("ETFs") just as artificial intelligence ("AI") and chip stocks turned sharply lower. A Goldman Sachs note reported on October 26 found that trading in leveraged index ETFs has been roughly double the trading in ETFs that track the same indexes without leverage (Yahoo Finance). Many of these products are brand new. If a financial advisor put you in one and you lost money, you may have a claim under Regulation Best Interest ("Reg BI"). Call (914) 304-4051 for a free consultation.

The AI and chip selloff, by the numbers

The PHLX Semiconductor Index ("SOX") was still up nearly 60% for 2026 as of October 16 (Yahoo Finance). Then the selling came in two waves:

October 7 to 16: the SOX fell eight sessions in a row, closing at 11,137.29, about 16% below its October 6 close. All 30 stocks in the index fell on October 16, amid worries about AI spending, financing costs and valuations (Investing.com).
October 22: the SOX fell more than 6%, its worst day since June, and closed below 11,000. A 60-stock Yahoo Finance chip basket had lost more than $3 trillion in market value since October 6. Lam Research and Applied Materials were each down about 30%, and Advanced Micro Devices more than 20% (Yahoo Finance).

How leverage magnified the losses

The Direxion Daily Semiconductor Bull 3X ETF ("SOXL") seeks three times the daily performance of semiconductor stocks. It fell from $164.27 on October 5 to $93.67 on October 16, a drop of more than 40%, while the SOX fell about 16% over roughly the same days. SOXL also made up about 90% of South Korean retail investors' net purchases of U.S. stocks from October 6 to 16 (Pulse by Maeil Business News Korea).

Retail investors kept buying the dip. J.P. Morgan reported that inflows into technology sector ETFs from October 15 to 21 were the second highest on record among its asset management clients, and tech ETF inflows set a single-day record on October 16 (Morningstar).

I explained the daily reset and "decay" that cause leveraged ETFs to drift away from their targets in my earlier post on leveraged ETFs. This post covers what is new.

A wave of new leveraged products

Issuers launched 276 single-stock ETFs, which use leverage, inverse bets or options on one company, in 2025 as of December 9, out of about 377 in total, according to Morningstar (CNBC).
In 2026, issuers rolled out 2x funds on chip stocks such as Microchip, NXP and ON Semiconductor in May (Tradr) and on SK hynix in July (Leverage Shares by Themes).
Issuers have filed for even more leverage. In January and February 2026, the Securities and Exchange Commission ("SEC") staff told Roundhill (proposed 4X SPY and 4X QQQ funds) and ProShares (proposed funds including "QuadPro Semiconductors") that it would not review filings for funds seeking more than 2x exposure until its concerns were addressed, and asked the issuers to revise or withdraw them (Roundhill letter; ProShares letter).

Why these are now Reg BI claims

Since June 30, 2020, Reg BI has governed broker-dealer recommendations to retail customers. The Financial Industry Regulatory Authority ("FINRA") amended its suitability rule, Rule 2111, so that it does not apply to recommendations subject to Reg BI (FINRA Regulatory Notice 20-18). For a retail investor, the question is whether the recommendation was in your best interest. Reg BI includes these obligations (17 C.F.R. § 240.15l-1):

Care obligation

The firm and financial advisor must understand the product's risks, rewards and costs (reasonable basis), and must have a reasonable basis to believe the recommendation is in your best interest given your investment profile (customer-specific). SEC staff list leveraged and inverse exchange-traded products among those needing "heightened scrutiny" and say such products may not be in a client's best interest "absent an identified, short-term, customer-specific trading objective" (SEC staff bulletin). FINRA warned as far back as 2009 that these funds "typically are not suitable for retail investors who plan to hold them for more than one trading session" (Regulatory Notice 09-31), and later stressed the need to understand complex products (Regulatory Notice 22-08).

Holding long term

Reg BI covers explicit recommendations to hold, and holds that result from account monitoring the firm agreed to provide (SEC compliance guide). A financial advisor who told you to ride out a 3x fund for months may be responsible.

Disclosure and conflicts of interest

Firms must give full and fair written disclosure of material facts, including fees and conflicts, and must have procedures to address conflicts that give the financial advisor an incentive to put his or her interests ahead of yours.

Reg BI applies to recommendations. If you bought on your own in a self-directed account, it generally does not apply (SEC joint statement).

Misrepresentation and omission claims

What you were told matters. You may have a misrepresentation or omission claim if a financial advisor:

Pitched a 3x fund as a long-term way to own the AI trade;
Never explained the daily reset, or that holding for weeks can produce losses even if chip stocks recover;
Downplayed how quickly the fund could fall, or how concentrated a single-stock fund is.

Advisory accounts

If a registered investment adviser ("RIA") manages your account, the adviser owes you a fiduciary duty, and SEC staff apply the same heightened scrutiny to complex products.

What to do now

Gather statements, trade confirmations and any notes or emails about the recommendation.
Write down what you were told about risk and holding periods.
Check whether leveraged funds sit in retirement savings, such as a 401(k) and IRA rollover. Learn more about poor retirement advice and complex products.
Act promptly. FINRA's eligibility rule is generally six years, and state deadlines can be shorter.

How I can help

I represent investors in FINRA arbitration against brokerage firms. I served as in-house counsel at one of the largest brokerage firms and worked at one of the largest defense law firms in the world. I have represented over 400 clients and recovered over $130mm for investors. Prior results do not guarantee a similar outcome. I represent investors nationwide; see the areas we serve. The consultation is free, and my firm is paid only if you recover. Contact me or call (914) 304-4051.

Frequently asked questions

Is a leveraged ETF loss automatically a claim?

No. Market losses alone are not claims. A claim usually requires a recommendation that was not in your best interest, or misleading statements or omissions.

I'm not a day trader. Should a financial advisor have recommended SOXL?

Regulators say these funds generally need a short-term, customer-specific trading objective and close monitoring. A buy-and-hold recommendation deserves a close look.

Are new single-stock leveraged ETFs riskier?

SEC staff have said holders of leveraged single-stock ETFs face even greater volatility and risk than holders of the stock itself, without the benefits of diversification (SEC staff statement).

Where would my claim be heard?

Usually in FINRA arbitration for brokerage accounts. Advisory account claims are often heard in private arbitration.

Attorney Advertising. This post is for general information only and is not legal advice. Reading it does not create an attorney-client relationship. Prior results do not guarantee a similar outcome. Daren A. Luma, PLLC, 75 South Broadway, Suite 400, White Plains, NY 10601, (914) 304-4051.