RIA Compliance Blog
Last week the Securities and Exchange Commission issued Proposed Amendments to the “internet adviser” basis for SEC registration found in Rule 203 A-2 (e). Currently, the rule provides that an adviser who provides investment advice nearly exclusively via an interactive website is eligible to register with the SEC, as long as the adviser maintains records demonstrating that it provides investment advice to its clients exclusively through an interactive website and does not control, is not controlled by, and is not under common control with another investment adviser registered with the SEC solely in reliance on the internet adviser registration basis. An adviser can still qualify to register on this basis if it provides investment advice outside the interactive website (e.g., by telephone, in person, or via email) to not more than 15 clients in a 12-month period.
In proposing the amendments, the SEC noted that the investment management industry has experienced considerable growth and change in the 20-plus years since the rule was adopted. The proposal purports to address some of the more significant changes in the industry, particularly as it relates to the use of technology.
The SEC also described several compliance deficiencies that it had observed during examinations over the years. Those deficiencies included advisers who had registered under the internet adviser rule who used advisory personnel to interact with, discuss and expand upon the investment advice provided through the website, or who provided additional investment advisory services – such as financial planning – to clients outside of the website. Additionally, the SEC’s examinations had discovered instances in which unregistered investment advisers affiliated with a registered adviser were operating improperly based upon the internet adviser’s registration.
Furthermore, the SEC noted that some investment advisers registered under the investment adviser rule were, in fact, providing advice to zero or only a few clients. Other advisers examined were unable to produce copies of books and records demonstrating that they complied with the conditions necessary to maintain the internet adviser status.
As a result of those observations, the SEC has proposed to make what it refers to as “targeted amendments” to Rule 203 A-2 (e) and to Form ADV. Those amendments, if adopted, would:
- require anyone relying on the internet adviser rule to have, at all times, an operational interactive website;
- eliminate the de minimis exception to the current rule, which provides that an adviser may provide non internet advice to up to fewer than 15 clients, will be eliminated.
The proposal would include certain important definitions, including defining “operational interactive website” as a “website or mobile application through which the adviser provides digital investment advisory services on an ongoing basis to more than one client.” The “more than one client” requirement means that an adviser who will be providing internet services to one or zero clients will not be eligible for registration as an internet adviser. This definition also has the effect of, among other things, recognizing that internet services are akin to services provided by mobile applications, and expanding the internet adviser rule to include services through mobile applications.
Any RIA intending to rely on the internet adviser basis for registration should carefully review the definitions and the proposing release.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.