SEC Narrows Scope of Internet Adviser Exemption

However, this rule was designed to be a narrow exemption for those who provide investment advice exclusively through an interactive website. In the Commission's adoption release, they explained: 
The Commission is adopting new rule 203A–2(f) under the Advisers Act to exempt from the prohibition on Commission registration certain investment advisers that provide advisory services through the Internet. An adviser is eligible for registration under the rule if the adviser provides investment advice to all of its clients exclusively through the adviser's interactive Website, except that the adviser may advise fewer than 15 clients through other means during the preceding 12 months.

The use of technology within the industry has evolved in the 20 years since its introduction. The SEC has observed a variety of business practices among firms relying on this rule, nearly half of which, according to this 2021 SEC Risk Alert, did not meet the exemption requirements. Most of those firms were not otherwise eligible for SEC-registration. As stated in that risk alert:
The staff observed advisers that (1) did not have an interactive website or (2) provided advisory personnel who could expand upon the investment advice provided by the adviser’s interactive website or otherwise provide investment advice to clients, such as financial planning.

To address the increasingly common deficiencies, the SEC has recently adopted an amendment to the Internet Adviser Exemption from the general prohibition against registration with the Commission. This amendment was adopted to narrow the scope of the exemption. To do so, the amendment:

1. Removes de minimis of in-person (or 1:1 client interactions)
2. Requires an “operational interactive website.”
3. Adds language to include mobile apps and digital platforms
4. Defines digital advisory service
5. Expands Form ADV to require representations of compliance with the rule

The Commission notes in the adopting release that the original version of the Internet Adviser Exemption included a provision allowing the adviser to serve a de minimis number of clients (no more than 15 in any rolling 12-month period) through other means beyond an interactive website. 

Given that technology and the way the populace interacts with both services and technology, the need for individual interactions has diminished significantly. The de minimis provision has been eliminated with this recent amendment as the Commission deemed the de minimis no longer necessary. The Commission said eliminating the de minimis will also enable examiners to more easily identify firms claiming the Internet Adviser Exemption that do not qualify based on the rule's requirements. The adopting release states, 

"Human-directed client-specific investment advice, even if delivered through electronic means, would not be eligible for activity under the Internet Adviser Exemption." 

The Commission notes that the elimination of the de minimis does not preclude supervised persons of the internet-only adviser from assisting clients with technical issues or from receiving feedback related to the firm’s interactive website or digital interface.

An “operational interactive website” will now also be a requirement for the Internet Adviser Exemption. The Commission acknowledges that there will be times when the adviser’s website is not operational (during updates, maintenance, or technical difficulties); however, those outages should be of a de minimis nature. Additionally, the outage should be no longer than absolutely necessary. 

The Commission found that many advisers claiming the exemption to register with the SEC needed an operational website or mobile app through which it provides digital investment advisory services. Given that the key to the Internet Adviser Exemption is a digital experience for the investor, a functional means to facilitate this digital experience is a platform through which the investor can obtain advice based on information supplied by the investor. The amendment clarifies and codifies the necessity of the digital platform for any advisor wishing to rely on this exemption to register with the SEC.

Beyond the operational interactive website, this amendment also added language to include mobile applications and more broad “digital platforms” language to enable the amendment to evolve as technology evolves. Smartphones were the exception when the Internet Adviser Exemption was first approved more than 20 years ago. Nearly everyone owns a smartphone and has used a mobile application for anything from shopping to medical care. Allowing this broader scope to define the interface between the client and digital advisory services will ensure the exemption remains relevant. 

To further clarify the meaning and intent of the internet-only adviser exemption, the amendment defines digital investment advice 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. An adviser must provide investment advice exclusively through an interactive website.”

Further, the adopting release states, "Human-directed client-specific investment advice, even if delivered through electronic means, would not be eligible activity under the Internet Adviser Exemption." 

This eliminates the possibility of an adviser providing advice generated by the firm’s registered personnel via a virtual platform like Zoom or other messaging and video conferencing systems from mistakenly believing that it would qualify their firm for the exemption. As noted in the amendment and adopting release, any advice provided by an investment adviser seeking to rely on the internet-only adviser exemption must be generated and delivered via digital means.

This amendment was adopted to narrow the scope and modernize the exemption. As noted, the Commission has observed many investment advisers attempting to rely on the rule, who need to be structured in alignment with the intent of the rule to provide a path to registration for those advisers who do not fit neatly into a state-by-state regulatory framework. 

It is unlikely that an adviser who did not qualify under the previous version of the rule will qualify under the amended rule, so this should not be mistaken for an opportunity to make the switch from state to SEC registration without changes to a more traditional investment adviser’s business model. 

So what does this mean for your firm? 
Advisors currently relying on the exemption should consider whether or not their practices continue to meet the requirements under the amended exemption. If you determine your firm would no longer qualify and you cannot rely on any other exemption as the basis for SEC registration, you would need to evaluate whether you can bring the firm into compliance by changing your service model or transitioning to state registration in one or more states. 

If you are providing direct advisory services to clients and have no intent on relying on this rule, this likely means little to your operation and registration. Navigate compliance with confidence with our free compliance guide, 'The Essential Guide to RIA Registration.'

Compliance Dates

The amendment will be effective 90 days after publication in the Federal Register; however, firms will have until March 31, 2025, to fully comply. The March 31 compliance date was selected to align with the annual deadline for most firms to file the annual updating amendment to Form ADV as the amended rule includes additional information in the Form ADV for advisers relying on the exemption to be registered with the SEC. Advisers who do not meet the requirements of the amended rule, and do not otherwise qualify for SEC-registration must file an ADV-W withdrawing from SEC-registration by June 29, 2025.