The SEC has adopted amendments to modernize the rule that exempts internet investment advisers from the prohibition on SEC registration for smaller investment advisers.

The amendments will, among other things:

• require an investment adviser relying on the exemption to, at all times, have an operational interactive website through which they provide investment advisory services on an ongoing basis to more than one client; and
• eliminate the current rule’s de minimis exception for non-internet clients, which permitted advisers relying on the internet adviser exemption to have a limited number (for example, fewer than 15) of non-internet clients in the preceding 12-month period; and
• amend Form ADV to require an adviser relying on the internet adviser exemption as a basis for registration to represent on Schedule D of its Form ADV that, among other things, it has an operational interactive website.

The Commission proposed the rules in July 2023, and the new amendments will become effective 90 days after publication in the Federal Register.

Investment advisers

Investment advisers are generally prohibited from registering with the SEC unless they either reach a assets-under-management threshold, advise a registered investment company, or qualify for an exemption under SEC rules or statute. Internet investment advisers are exempt from this prohibition under SEC Rule 203A-2(e) if they meet certain conditions, including those relating to the adviser’s use of an interactive website to advise clients.

“In a 2021 risk alert, staff noted that nearly half of the examined advisers that claimed the exemption in fact were ineligible.”

Gary Gensler, chair, SEC

The SEC said in its press release announcing the changes that the final amendments are designed to modernize rule 203A-2(e) to reflect the broader evolution in technology since the rule’s adoption in 2002. The changes are also intended to better align current practices in the investment adviser industry with the narrow exemption for certain investment advisers that did not fall neatly within the framework established by law.

In this way, investment advisers seeking to register with the agency who would otherwise be prohibited from doing so pursuant to section 203A of the Advisers can now do so, subject to the requirements about providing investment advice to all clients exclusively through their interactive website.

Compliance deficiencies

In 2002, the SEC provided investment advisers with the Internet Advisers Exemption – allowing internet-based advisers that provided substantially all of their advisory services over the internet to register with the SEC instead of with the states.

“A lot has changed in the 22 years since,” chair Gary Gensler said. “I believe an exemption written in 2002 allows gaps in 2024. In recent years, staff have observed compliance deficiencies by advisers relying on this exemption. In a 2021 risk alert, staff noted that nearly half of the examined advisers that claimed the exemption in fact were ineligible,” he said.

Thanks to these amendments, he observed, firms that wish to use the exemption to be regulated by the SEC rather than state securities regulators will be able to do so, as long as they advise clients through the internet and do so from the moment the firms rely on this exemption. Currently, the rule allows advisers to qualify as internet advisers while, for instance, also serving a small number of investors in person, over the phone, or by other means.

Gensler said the changes better reflect what it means in 2024 truly to provide an exclusively internet-based service, and help the SEC more effectively oversee registered investment advisers.