The SEC Amends the Internet Adviser Exemption

On March 27, 2024, the US Securities and Exchange Commission (SEC) adopted amendments to Rule 203A-2(e) of the Investment Advisers Act of 1940 (the Advisers Act) (the Internet Adviser Exemption).¹ The amended Internet Adviser Exemption will (i) require all investment advice to be provided through the internet (eliminating the de minimis exception for providing advice to a limited number of clients by other means) and (ii) replace the term “interactive website” with a new defined term, “operational interactive website,” which, among other things, is intended to pick up digital platforms and other future technology in addition to traditional websites.

Background

The Internet Adviser Exemption, which was originally adopted in 2002, is one of several exemptions adopted by rule that permits investment advisers to register with the SEC even though the advisers do not meet the eligibility requirements for federal registration in Section 203A. The Internet Adviser Exemption currently permits an investment adviser to register with the SEC if it:

• Provides investment advice “to all of its clients exclusively through an interactive website,” except that it may provide advice to fewer than 15 clients during a 12-month period by other means (referred to as the “de minimis exception”);
• Maintains certain records demonstrating that it provides investment advice to its clients exclusively through an interactive website as provided in the rule; and
• Does not control, is not controlled by, and is not under common control with another investment adviser that registers with the SEC solely in reliance on its affiliation with the internet adviser.

Summary of the Amendments

The amendments to the Internet Adviser Exemption are designed to “modernize the rule’s conditions to account for changes in technology and the investment advisory industry”² and to preserve its narrow scope. The SEC exam staff has observed compliance deficiencies by advisers relying on the Internet Adviser Exemption, including reliance upon the exemption by advisers that are ineligible to do so.³

The SEC adopted two changes to the Internet Adviser Exemption. First, the amendments remove the de minimis exemption, which permits advisers relying on the Internet Adviser Exemption to have fewer than 15 non-internet clients in the preceding 12-month period. The amendments require any investment adviser relying on the Internet Adviser Exemption to provide all advisory services, including investment advice to all of its clients, exclusively through an “operational interactive website.”

The term “operational interactive website” is defined as “a website or mobile application through which the investment adviser provides digital investment advisory services on an ongoing basis to more than one client (except during temporary technological outages of a de minimis duration).”⁴ “Digital investment advisory service” is defined as “investment advice to clients that is generated by the operational interactive website’s software-based models, algorithms, or applications based on personal information each client supplies through the operational interactive website.”⁵

The amendments also made changes to Form ADV that require advisers relying on the Internet Adviser Exemption to represent in Schedule D that the adviser has an operational interactive website.

Compliance Date

The amendments are effective July 8, 2024, with March 31, 2025, as the compliance date. It is likely the amendments will reduce the number of advisers eligible to register under the Internet Adviser Exemption. Advisers registered with the SEC under the current exemption that do not meet the requirements of the amended Internet Adviser Exemption and do not have another basis for registration will need to withdraw their SEC registration by filing Form ADV-W by June 29, 2025, and should consider their state registration obligations.

 

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^[1] See “Exemption for Certain Investment Advisers Operating Through the Internet,” Release No. IA-6578. 
^[2] Id. at p. 24693.
^[3] Id. at p. 24696.
^[4] Id. at p. 24698.
^[5] Id.

 

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