Brief overview
On March 27, 2024, the U.S. Securities and Exchange Commission (SEC) adopted amendments (the Amendments) to Rule 203A-2(e) under the Investment Advisers Act of 1940 (Advisers Act). Rule 203A-2(e) is commonly known as the “Internet Advisor Exemption.” Originally passed in 2002, advisors relying on the Internet Adviser Exemption are allowed to register with the SEC even if they do not have sufficient assets under management or otherwise qualify for federal registration. The changes significantly limit the exemption for internet advisors by:
- Eliminating the de minimis exception for non-internet customers;
- Require advisors relying on the Internet Adviser Exemption to maintain an “operational interactive website” at all times; And
- Reinforcing the fact that the exemption for internet advisors is limited to advisors who provide only digital investment advisory services, meaning that the advice itself is generated by the website’s software-based models, algorithms or applications.
The amendments are in part an effort to preserve SEC investigative resources and a response to the SEC’s concerns that many advisors claim to rely on the Internet Adviser Exemption without complying with its terms, and that many of those advisors are otherwise not in qualify for SEC registration.1 The amendments also reinforce that while advisors are increasingly integrating technology into their client interactions, interacting with clients through a website or mobile application is not a sufficient basis for invoking the Internet Adviser Exemption. The advice itself must be generated via the website, mobile application or a similar digital platform.
Key Takeaways
Advisors who currently rely on the Internet Adviser Exemption should ask themselves whether they meet the conditions to continue to qualify for the amended exemption.
If advisors cannot rely on the Internet advisor exemption, they should consider changing their business model (e.g., eliminating non-Internet clients) to fall within the modified exemption, assessing whether they can rely on a different basis for SEC registration, or register with one or more states.
Changes to the exemption for internet advisors
De Minimis Exception
Before the Amendments, advisors could rely on the Internet Advisor Exemption if, among other things, they provided investment advice to all their clients exclusively through an interactive website, provided that they were permitted to provide investment advice to fewer than 15 non-Internet clients during the previous 12 months. The amendments eliminate this de minimis exception. Accordingly, the Amendments require that all customer interactions take place exclusively through an operational interactive website.
Therefore, to the extent advisors currently relying on the Internet Advisor Exemption have non-Internet clients, these advisors should consider their ability to continue to rely on the exemption or take action to modify their operations.
“Operational” interactive website
The Amendments require advisors who rely on the Internet Adviser Exemption to provide investment advice to all their clients through “operational” interactive websites throughout the period in which they rely on the exemption.
The amendments renamed the term “interactive website” to “operational interactive website” and defined it as a website, mobile application or similar digital platform through which an advisor provides “digital investment advisory services” (discussed below) on an ongoing basis to more than one customer (except during temporary technological disruptions of a de minimis duration).2 Notwithstanding the proposed rule, the SEC has included any “similar digital platform” in the definition to keep the rule evergreen as technology changes.
The SEC noted that the addition of the term “operational” reinforces the amended rule’s requirement that advisors remain available at all times during the time they are relying on the Internet Adviser Exemption, except in the case of matters that are not related to the provision. of investment advice (for example to solve technical problems, help customers navigate the website or collect feedback).3 This concept was added largely in response to SEC research findings that some advisors registered under the Internet Adviser Exemption but did not maintain an interactive website.
The amended rule allows advisors relying on the Internet Adviser Exemption to provide digital investment advisory services through any form of mobile application technology or similar digital platform. In addition, the SEC has provided further clarity on the meaning of the term “ongoing,” noting that advisors provide ongoing investment advice through their websites if the advice is within the scope of the advisor-client relationship. We understand that this means that while advisors relying on the Internet Adviser Exemption must provide advice to more than one client on an ongoing basis, the advice itself does not have to be continuous. Instead, the advice may be of limited duration (e.g. for a one-off financial plan) or have an ongoing discretionary relationship, as long as the advisors each provide advice to more than one client at any time and during the time they are dependent on the Exemption for internet advisors.
“Digital investment advisory services”
Under the amendments, advisors relying on the rule are limited to only offering “digital investment advisory services” to clients. A “digital investment advisory service” is a service that provides investment advice to clients, generated by the software-based models, algorithms or other applications of the operational interactive website, based on personal information provided by each client through the interactive website.
The SEC further clarified that to qualify for the exemption, the investment advice provided to clients must be “generated by” the website’s software-based model, algorithms, or applications. Therefore, any people-oriented, client-specific investment advice, even if provided electronically, would not be a qualifying activity under the Internet Advisor Exemption. However, advice that comes exclusively from an advisor’s website and which the advisor does not elaborate on is permitted under the amended exemption.
Form ADV
The SEC is also amending Form ADV to require advisors relying on the Internet Adviser Exemption as a basis for registration to declare on Schedule D that, among other things, they have an operational interactive website.
Effective and Compliance Dates
The changes will become effective 90 days after publication in the Federal Register.
The compliance date for the amended Internet Adviser Exemption is March 31, 2025. Advisors who are no longer eligible to rely on the amended Internet Adviser Exemption and otherwise have no basis for registration with the SEC must complete their registration with the SEC by March 29 to withdraw. June 2025 and register in one or more states. The SEC expects to cancel the registration of advisors who have not revoked their registration by this date.
