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New SEC Rules for Investment Advisers Operating Exclusively Online

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New SEC Rules for Investment Advisers Operating Exclusively Online

VerifyInvestor.com

On March 27, 2004, the Securities and Exchange Commission (SEC) announced its adoption of amendments to Rule 203A-2(e) of the Investment Advisers Act of 1940.

Known as the “Internet Advisers Exemption,” Rule 203A-2(e) provides an exemption that relieves investment advisers who conduct their business solely on the Internet but who do not meet certain monetary thresholds, of the prohibition forbidding them to register with the SEC. As will be discussed more fully below, not being allowed to register with the SEC burdens internet investment advisers with having to register in every single state in which they do business.

The Internet Advisers Exemption hasn’t changed in over 20 years. The SEC’s recent amendments are designed to update and modernize the terms of the Internet Advisers Exemption to reflect changes in technology and in the industry. 

Accredited investors, issuers, investment firms, and funds, as well as those who use an accredited investor verification service, will all be quite familiar with the specific requirements the SEC places on investors and investment advisers. They will also be accustomed to the fact that the SEC frequently amends and updates its rules, regulations, and forms to reflect changes in both technology and the industry as a whole. 

In this article, we will look at what changes the SEC will be making to the Internet Advisers Exemption.

Regulation of Investment Advisers: Just the Basics.

The Investment Advisers Act of 1940 (the “Investment Advisers Act” or “the Act”) is a federal law that governs the activities of investment advisers.

The Act was developed as a response to the stock market crash of 1939 and the Great Depression. Based on events leading up to these historical events and information provided by the SEC, the Investment Advisers Act declared that investment advisers were of “national concern,” and needed to be regulated.

The Act sets out the rules and regulations for investment advisers. It defines who is an “investment adviser,” and establishes fiduciary standards that all investment advisers must comply with.

An investment adviser, (i.e., any firm or individual who is compensated for advising others about securities investments), must register with the SEC unless they qualify for an exemption or are prohibited from registration.

Generally, smaller advisers (those with less than $25 million assets under management) and others who meet certain statutory requirements, must register with the state where they maintain their principal place of business. Those with between $25 and $100 million in assets under management also must register with the state. However, investment advisers with $100 million or more in assets under management or who provide investment advice to investment companies that are registered with the SEC must register with the SEC.

Broadly speaking, investment advisers with less than $25 million in assets under management are prohibited from registering with the SEC. 

Before the passage of the Internet Advisers Exemption, the registration threshold presented a significant problem for investment advisers who conducted their businesses exclusively online (referred to as “Internet investment advisers”). This is because the lack of an exemption meant that Internet investment advisers had to register in every single state in which they conducted business. To eliminate this burden, over 20 years ago the SEC adopted Rule 203A-2(e) — exempting investment advisers that provided their services exclusively through the Internet from the prohibition on registration.

The exemption applied to investment advisers who conducted business exclusively through an “interactive website.” An “interactive website” is defined as “a 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.”  

In addition, the 2002 amendments allowed for a “de minimis” exception that allowed internet advisers to still take advantage of the exemption so long as they provided investment advice to fewer than 15 non-internet clients during a 12-month period preceding their use of the exemption.

The SEC’s 2024 amendments have affected both of these elements of the exemption.

What are the New Rule’s Requirements?

Operational Interactive Website Required

First, the new amendments have changed the requirement that internet investment advisers have an “interactive website” to qualify for the exemption.

Now, in order to meet the exemption’s requirements, investment advisers who conduct their business online must offer their services on an ongoing basis to more than one client exclusively through the use of an “operational” interactive website.”

The final Rule incorporates some changes to the original definition of “operational interactive website,” and, as finalized, now refers to:  

“… a website or 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 operational interactive website must be used exclusively for business purposes. It cannot be used merely as a “prop” or “front” for internet advisers.

The amended rules also require internet investment advisers who are relying on the exemption to represent on Schedule D of Form ADV that they have an operational interactive website.

No De Minimis Exception

The next significant change is that the SEC has eliminated the de minimis exception. 

The Internet Advisers Exemption currently allows Internet investment advisors who want to qualify for the exemption to have 15 non-internet clients in a 12-month period preceding the application of the exemption. Finding that the de minimis exception is no longer needed, the Rule now requires that internet investment advisers service all their clients online. 

Internet investment advisers that have non-internet clients will need to use a different exemption or register with the state.  

When is Compliance Required?

The new changes to the Internet Advisers Exemption will become effective 90 days after the amendments are published in the Federal Register.

Compliance with the rule — including Form ADV compliance representing that the adviser has an operational interactive website — will be required by March 31, 2025. 

As can be seen from these recent amendments to “modernize” the Internet Advisers Exemption, the SEC is cracking down on Internet advisers to “better protect investors in [the] digital age.”

Here at VerifyInvestor.com, helping issuers and investors overcome regulatory hurdles is paramount. This understanding drives us to provide top-tier accredited investor verification services. Our offerings prioritize speed, efficiency, affordability, confidentiality, and dependability. We streamline the process, ensuring companies effortlessly meet their legal mandates to verify accredited investors.