On March 27, 2024, the U.S. Securities and Exchange Commission (“SEC”) announced amendments to the Internet Adviser Exemption, which permits investment advisers that provide advisory services through the internet (“Internet Investment Advisers”) to register with the SEC under the Investment Advisers Act of 1940 (“Advisers Act”) if they do not otherwise have enough assets under management to be eligible for registration.[1] The final rule seeks to address technological and industry advancements since the original Internet Adviser Exemption was adopted in 2002. The final rule also amends the interactive website requirement, eliminates the exception for advisers with de minimis non-internet clients, and imposes additional reporting requirements for Internet Investment Advisers on Form ADV.
The Internet Adviser Exemption
Under Section 203A of the Advisers Act, advisers are generally prohibited from registering with the SEC unless they either have at least $100 million in assets under management ($25 million for advisers domiciled in New York) or advise a registered investment company. An adviser that cannot register with the SEC but provides investment advisory services in the United States must look to the State in which it is organized and each State where it provides advisory services to determine whether it must register in one or more of those States. As a practical matter, most internet advisers had to register in every State and be subject to potentially different requirements and any number of examinations.
In 2002, the SEC adopted the Internet Adviser Exemption, which is aimed at relieving advisers who provide advisory services through the internet from this State-by-State registration burden. The SEC described the 2002 exemption as being “intended as a narrow exception for entities that exclusively provide investment advice through an interactive website.”
Exemption Details and Amendments
“Interactive Website” Requirement
The current Internet Adviser Exemption requires advisers to maintain an interactive website “in which computer software-based models or applications provide investment advice to clients based on personal information” provided by each client through the website. The final rule changes this provision and requires “a website, mobile application, or similar digital platform 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).” With this change, the SEC narrows the applicability of the exemption by requiring that an adviser (1) have an “operational” website at all times during which the adviser relies on the exemption (unless the website is affected by temporary technological outages of a de minimis duration) and (2) provides “comprehensive discretionary and continual advice to a retail client” to meet the on‑going basis requirement.
On the positive side for the industry, this change also broadens the scope of applicable digital platforms beyond the 2002 meaning of a “website.” The new definition accounts for new technological advancements since 2002 and specifically captures mobile apps and “similar digital platform[s]” to account for future developments.
The final rule further defines “digital investment advisory service” to mean “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 website. While this definition does not impose any new restrictions on Internet Investment Advisers, it does explicitly require such advisers to provide investment advice exclusively through the website and prohibits them from providing any “human-directed client-specific investment advice.”
De Minimis Exception
The current Internet Adviser Exemption allows an Internet Investment Adviser to rely on the exemption even where it has provided investment advice to up to 15 non-internet clients during the preceding 12 months. The SEC explained that the de minimis exception was initially adopted to provide advisers some flexibility “at a time when providing advice [digitally] was still in a fairly nascent stage.” The final rule eliminates the de minimis exception and prohibits Internet Investment Advisers from providing advice to any non-internet clients. Instead, an Internet Investment Adviser must provide advice to clients only through its operational interactive website. The SEC explained that the development and improvement of digital platforms along with the widespread use of the internet obviates the need for the de minimis exception. This change is potentially significant, because it will prevent Internet Investment Advisers from engaging directly with even just one or two clients. While digital platforms have improved, some internet clients want to engage directly with Internet Investment Advisers. And while the Adopting Release provides that such clients may engage with Internet Investment Advisers about technical questions, any investment advice given by representatives of the Internet Investment Adviser will constitute a violation of the final rule.
Registration
The SEC also adopted changes to Form ADV that will require an Internet Investment Adviser to represent on Schedule D of its Form ADV that it has an operational interactive website. The current Form ADV already requires advisers to indicate whether they are relying on the Internet Adviser Exemption. The SEC explained that this change seeks to prevent erroneous registrations, especially from registrants not aware of the new “operational interactive website” requirement.
Applicability
The amendments to Rule 203A-2(e) will become effective on July 8, 2024, 90 days after publication in the Federal Register, and have a compliance date of March 31, 2025. Any adviser that is no longer eligible for registration under the Internet Adviser Exemption and is not otherwise eligible to register with the SEC, will need to register in one or more States and withdraw its SEC registration by June 29, 2025.
The amended rule will also require Internet Investment Advisers to maintain certain records as required by section 203A-2(e)(1)(ii) of the amended rule.
[1] SEC Adopts Reforms Relating to Investment Advisers Operating Exclusively Through the Internet, Release No. IA-6578 (Mar. 27, 2024), https://www.sec.gov/news/press-release/2024-42 (“Adopting Release”).
