A little over 20 years ago, when the Internet was still just a few years into gaining widespread use, the SEC understood its potential to transform how financial advisory firms conducted business with the ability to deliver advice digitally, lowering the barriers to serve clients across the country. However, the challenge for firms that wanted to use their websites to advise clients, but didn't otherwise qualify for SEC registration, was that they would ostensibly need to register in all 50 states… at least until they qualified as a "multi-state adviser".
Understanding that this would place an unnecessarily heavy burden on advisors, the SEC issued an exemption in 2002 allowing for certain "Internet advisers" to register with the SEC even though they wouldn't otherwise qualify to do so. The rule, colloquially referred to as the "Internet Adviser Exemption", applied to "entities that exclusively provide investment advice through an interactive website", save for a de minimis exemption of fewer than 15 clients served outside of the interactive website within the preceding 12 months.
A lot has changed over the ensuing 20+ years since the issuance of the Internet Adviser Exemption, and after observing numerous instances of non-compliance (and issuing a Risk Alert to that effect in 2021), the SEC issued an amendment to the Exemption on March 27, 2024. The amendment didn't make any sweeping changes to the requirements for firms to qualify for the exemption, but instead was intended to offer additional clarification around "what it means in 2024 truly to provide an exclusively internet-based service."
Specifically, the amendment clarifies that an interactive website (which now also includes mobile applications or similar digital platforms) must be "operational" at "all times", save for temporary outages due to periodic maintenance or factors outside the adviser's control. Moreover, the advisory services must actually be delivered through the website using "software-based models, algorithms, or applications" only, thus barring investment adviser personnel from generating, modifying, or providing "client-specific investment advice through the operational interactive website or otherwise." The amendment also eliminates the previous de minimis threshold, now requiring Internet investment advisers to provide advice to all of their clients exclusively through an operational interactive website without exception, and requires that advice be provided on an "ongoing basis" to at least 2 clients at all times.
Ultimately, the key point is that while the original intent of the Internet Adviser Exemption created in 2002 was to reduce the regulatory burden of SEC registration for advisers who provide advisory services through a website using software-based models, algorithms, or applications, the recent 2024 amendment offers several clarifications and updates to the rules for qualifying for the exemption. And while the updates may have constricted the already narrow path to SEC registration even further, the good news is that the amendment remains agnostic in regard to technology, which means that the Internet Adviser Exemption should remain evergreen for years to come.
