The Securities and Exchange Commission (SEC) has enacted a significant update to the registration process for smaller online investment advisors, mandating federal registration over state-level oversight.
This move refines a previous 2002 exemption, addressing the misuse and adapting to the evolving digital landscape, as noted by SEC Chairman Gary Gensler. The update responds to the findings that nearly half of the Registered Investment Advisors (RIAs) leveraging the internet exemption were actually ineligible, highlighting the necessity for stricter guidelines.
Under the new regulation, effective 90 days post its Federal Register publication with a compliance deadline of March 31, 2025, investment advisory firms must operate with a continuously accessible website that begins serving clients immediately upon engagement and for the entirety of the advisory relationship.
Eligibility for the updated internet advisor exemption requires advisors to exclusively provide services online, without any in-person or telephonic interactions, ensuring a purely digital service model.
Advisors must cater to more than a single client to qualify for this exemption, specifically excluding hybrid client relationships to streamline the digital-only service criterion. This delineation underscores the SEC's intention to ensure that firms operating under this exemption genuinely offer internet-based advisory services from the inception of their reliance on the exemption.
The revised regulation also specifies that advisory firms must be entirely digital to qualify for the exemption, eliminating eligibility for those offering any form of in-person consultation or telecommunication. This aims to purify the definition of an internet-based advisory service, aligning regulatory requirements with the current technological standards and enhancing the SEC's oversight capabilities.
RIAs utilizing the internet exemption are required to update their Form ADV filings to confirm compliance with the new eligibility criteria by March 31, 2025. Firms that no longer meet these criteria must transition to state-level registration and withdraw their SEC registration by June 29, 2025.
Chairman Gensler emphasizes that these updates are pivotal in defining the essence of a truly internet-based advisory service in today’s digital age, thereby facilitating more efficient and effective regulatory oversight of RIAs.
