The U.S. Securities and Exchange Commission adopts amendments to the increasingly used “Internet Consultant Exemption.” The exemption, originally passed in 2002, facilitated the use of digital platforms for investment advice as it allowed nascent companies to develop across the country under a single regulatory license. However, as such platforms grew, the SEC observed practices by companies relying on exemptions that the SEC considered inconsistent because it wanted the exemptions to be used more narrowly. Specifically, the SEC noted that it found that the relied-upon advisor had no “interactive website” at all. Based on the observation, the SEC’s adoption release included a chart showing that 39% of firms relying on the internet advisor exemption reported zero clients. The recent amendments seek to continue the exemption while strengthening the standards to better ensure that the exemption only applies to advisers who meet the original intent of the “narrow exemption.”
The Internet Adviser Exemption allows investment advisers to register with the SEC even if they do not yet have sufficient business to qualify for SEC registration through other available avenues. Without the exemption, such advisory firms would be required to either obtain investment adviser registration in every state (i.e., an expensive option for new business) or limit the jurisdictions in which they can solicit clients (i.e., substantial limitations).
The recently adopted amendments do not significantly reduce the availability of exemptions, but they do reduce the potential for abuse. The following overview sets out some key points about the updated exemptions:
- There must be one “Operating interactive websites.”
- The term “operating an interactive website” includes websites, mobile applications and a broad category of “similar digital platforms” to accommodate developments in technology.
- Operating interactive websites must continue to provide “digital investment advisory services” to more than one customer.
- Importantly, operational interactive website requirements must be met all the timeincluding when a company applies for SEC registration under an exemption.
- Therefore, some companies seeking to rely on the Internet consultant exemption may need to first rely on another SEC registration basis (such as the 120-day rule).
- “Digital investment advisory services” must be investment advice generated by operating an interactive website Software-based models, algorithms or applications Based on the personal information provided by each customer By operating an interactive website.
- The definition specifically addresses the fact that the Internet advisor exemption cannot simply be used to provide human-driven, client-specific investment advice.
- internet consultant No more non-internet clients.
- Currently, the exemption allows dependent advisors to have non-Internet clients as long as the number is fewer than 15 in the past 12 months.
- This exception will be eliminated, which will eliminate the possibility of Internet consultants providing services any Direct and personal customers.
- Internet advisors are still available for human interaction. However, these communications may not be used to illustrate investment recommendations generated by the algorithms operating the interactive website.
- Instead, direct human contact should be limited to technical issues using the platform or explaining how algorithms are developed or run.
- Form ADV will be updated to require companies relying on the Internet Consultant Exemption Active representation It maintains an operational, interactive website.
- The compliance date for the revised rules is March 31, 2025.
- This date generally corresponds to when the advisor submits amendments to the annual update.
- Companies that can no longer rely on the internet consultant exemption must register with the necessary state regulators and deregister with the SEC by June 29, 2025.