The SEC Adopts Amendments to the Internet Adviser Exemption

The continual rise in the number of internet investment advisers has caused the evolving of certain securities rules from  the SEC. Since the emergence of internet investment advisers, the SEC has undertaken measures to create and amend rules to properly regulate such entities. One of such rules is promulgated under Section 203A of the Investment Advisers Act of 1940 (the “Advisers Act”), which prohibits an investment adviser from registering with the SEC unless the investment adviser (1) has more than $25 million of assets under management (“AUM”), or (2) is an investment adviser to a registered investment company.

Under Section 203A of the Advisers Act, internet investment advisers are not eligible to register with the SEC since internet investment advisers do not manage the assets of their internet clients and do not meet the $25 million AUM statutory threshold for registration with the SEC. For this reason, internet investment advisers often register with the state securities authorities in all states.

To provide relief from the prohibition on SEC registration to internet investment advisers, on December 12, 2002, the SEC adopted Rule 203A-2(f), which is referred to as the Exemption for Certain Investment Advisers Operating Through the Internet (the “Internet Adviser Exemption” or “Exemption”). Under the Internet Adviser Exemption, internet investment advisers can register with the SEC if the internet investment adviser provides investment advice to all clients exclusively through an interactive website with the de minimis exception that the internet investment adviser may advise up to 15 non-internet clients during the preceding 12 months. However, this has now changed.

On March 27, 2024, the SEC adopted amendments to the Internet Adviser Exemption. In a press release, the SEC announced the Internet Adviser Exemption has been amended to require an internet investment adviser to:

• Have at all times an operational interactive website to provide digital investment advisory services on an ongoing basis to each client;
• Provide advice to each client exclusively through an operational interactive website, eliminating the de minis exception which allows the adviser to provide advice to non-internet clients; and
• Make certain reporting on Schedule D of Form ADV.

The rule as amended will become effective on July 8, 2024, 90 days after publication in the Federal Register, and internet investment advisers have a compliance date of March 31, 2025. An investment adviser that no longer relies on the Internet Adviser Exemption must withdraw its SEC registration by June 29, 2025, and should consider seeking advice from legal counsel to determine whether to register with the state securities authorities in one more state.