The SEC adopted amendments on March 27 to its rule that permits certain internet investment advisers to register with the Commission instead of with states. The changes pertain to the internet advisor exemption which the SEC added in 2002 to the Investment Advisers Act of 1940.
For advisors relying upon the internet advisor exemption as a basis for registration, the adopted amendments will:
Require them to have at all times an operational interactive website that provides digital investment advisory services on an ongoing basis to more than one client.
Eliminate the de minimis exception for non-internet clients by requiring these advisors to provide advice to all clients exclusively through an operational interactive website. Previously they were permitted to have fewer than 15 non-internet clients in the preceding 12 months.
Require these advisors to represent on Schedule D of their Form ADV that they have, among other things, an operational interactive website.
The Impetus
“These amendments modernize a 22-year-old rule to better protect investors in a digital age,” SEC Chair Gary Gensler said in a recent press release announcing the adoption of the reforms.
“These changes better reflect what it means in 2024 truly to provide an exclusively internet-based service. This will better align registration requirements with modern technology and help the Commission in the efficient and effective oversight of registered investment advisers,” he continued
“In 2002, the SEC granted what was intended to be a narrow exception allowing internet-based advisers to register with the Commission instead of with the states,” Gensler said in a release last July when the SEC proposed the just-adopted reforms.
Between its 2002 introduction through Dec. 31, 2022, approximately 845 advisors have relied on the internet advisor exemption as their basis of registration with the SEC. As of Dec. 31, 2022, approximately 256 advisers were relying exclusively on the internet adviser exemption. The exemption has been used with increasing frequency, says the SEC.
However, the internet advisor exemption has not been used properly by many advisors, says the SEC. In 2021, SEC staff found that nearly half the advisors it examined who claimed reliance on the rule were ineligible to do so. Many of these advisors were not otherwise eligible to register with the SEC. SEC staff also observed that many advisors relying on the exemption did not have an interactive website. Other advisors were providing advice to 15 or more clients other than through their website, the SEC discovered.
Remote Relationships Gaining Popularity
Although less than 13% of advisors report that more than 75% of their clients are entirely remote, according to a 2022 Smart Asset study, more client-advisor relationships are going remote. Just 44% of advisors surveyed by Smart Asset say fewer than one-quarter of their clients are totally remote, down from 83% before the pandemic.
