On March 27, 2024, the Securities and Exchange Commission ("SEC") adopted amendments to the rule allowing internet-based investment advisers to register with the SEC instead of with states (the "internet adviser exemption").1 The reforms modernize the 22-year-old rule by aligning its scope with current practices across this industry and addressing existing compliance challenges.
Background
The responsibility for regulating investment advisers is divided between the SEC and state regulatory agencies.2 Section 203A of the Investment Advisers Act of 1940 (the "Advisers Act") generally prohibits investment advisers from registering with SEC unless the adviser has more than $25 million in assets under management or is an adviser to a registered investment company.3 Under this structure, an internet-based adviser would be required to register with state regulatory agencies because such advisers do not typically manage their clients' assets or advise registered investment companies and would therefore fall outside of the requirement for SEC registration.4
In 2002, the SEC adopted what were intended to be narrow exemptions to address the registration burden placed on internet-based advisers.5 Rule 203A-2(f) under the Advisers Act permitted SEC registration for advisers that provide investment advice to all of their clients exclusively through an interactive website.6 The rule also provided an exemption for internet-based advisers that served fewer than 15 non-internet clients within the previous 12 months.7
2024 Amendments
Since the implementation of the 2002 rules, the SEC staff has observed significant gaps in compliance, and there have been advancements in the technology for providing internet-based services.8 The SEC staff recently noted that nearly half of those advisers relying on the internet adviser exemption were ineligible and that the SEC has cancelled registration in such instances of non-compliance.9 Moreover, advisers have increasingly used a variety of technologies, from mobile applications to artificial intelligence, to offer and provide their services in a manner not contemplated in 2002.10
Accordingly, the SEC adopted the following amendments to modernize the internet adviser exemption and preserve its narrow scope:
Operational Interactive Website
Advisers relying on the internet adviser exemption to register with the SEC must provide their investment advice exclusively through an operational interactive website. An operational interactive website is 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)." The adviser must provide the services through the website at all times during which it relies on the exemption.11
Elimination of De Minimis Exception for Non-Internet Clients
Advisers relying on the internet adviser exemption may no longer provider services to any non-internet clients. All services must be provided exclusively through the adviser's operational interactive website. Advisers with non-internet clients may register with states or rely on another exemption for SEC registration.12
Corresponding Form ADV Changes
The reforms amend Form ADV to require an adviser relying on the internet adviser exemption to represent on Schedule D of its Form ADV that it has an operational interactive website. The amendments will also require advisers to make additional representations that more clearly note the requirements of the exemption.13
The amendments to the internet adviser exemption will become effective 90 days after publication in the Federal Register. An adviser relying on the exemption must comply with the amended rules, including the requirement to amend its Form ADV to include the required representations, by March 31, 2025. An adviser that is no longer eligible for the exemption and otherwise ineligible for SEC registration must register in one or more states and withdraw its SEC registration by filing a Form ADV-W by June 29, 2025.14
1 See Exemption for Certain Investment Advisers Operating Through the Internet, Release No 1A-6578 (March 27, 2024) ("2024 Adopting Release").
2 See Exemption for Certain Investment Advisers Operating Through the Internet, Release No. 1A-2091 (December 12, 2002) ("2002 Adopting Release").
3 Id.
4 Id.
5 Id.
6 Id.
7 Id.
8 See SEC Chair Gary Gensler's "Statement on Internet Investment Advisers".
9 See SEC Division of Examinations Staff, "Observations from Examinations of Advisers that Provide Electronic Investment Advice" (November 9, 2021).
10 See 2024 Adopting Release.
11 Id.
12 Id.
13 Id.
14 Id.
Dylan Abolafia (Law Clerk, White & Case, New York) contributed to the development of this publication.
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