Compliance Requirements: Exemption for Certain Investment Advisers Operating Through the Internet (Rule 203A-2(e)

As a reminder, amended rule (“rule 203A-2(e)” or “Internet Adviser Exemption”) under the Investment Advisers Act of 1940 (“Advisers Act” or “Act”) will impose certain reporting, recordkeeping, and compliance requirements on investment advisers relying on the exemption for registration with the SEC, including those that are small entities. The SEC proposed the rules on July 26, 2023. The amendments will become effective 90 days after publication in the Federal Register. An adviser relying on the internet adviser exemption must comply with the rule, including the requirement to amend their Form ADV to include a representation that the adviser is eligible to register with the SEC under the internet adviser exemption, by March 31, 2025.

Noteworthy changes include:

• General Amendments to Form ADV.
• The amended rule will require an adviser to make representations on its Form ADV, Part 1A, Schedule D, indicating that it satisfies the requirements of the rule.
• An adviser relying on the rule as a basis for registration will be required to represent on Schedule D of its Form ADV that it provides investment advice on an ongoing basis to more than one client exclusively through an operational interactive website.

Key Takeaways for CCOs

1. The amended rule will require an Internet investment adviser to provide investment advice to all of its clients exclusively through an operational interactive website at all times during which the adviser relies on the Internet Adviser Exemption.
   • The rule's definition of “interactive website” will be renamed to “operational interactive website” and will be expanded to include mobile applications or similar digital platforms;
   • the definition will also be amended to define operational interactive website as a website, mobile application, or similar digital platform through which the investment adviser provides digital investment advisory services on an ongoing basis to more than one client (except during temporary technological outages of a de minimis duration).
   • In addition, the amended rule will remove the current rule's de minimis exception, which allows advisers relying on the rule to provide advice to fewer than 15 clients through means other than an interactive website during the preceding 12 months.
2. The amended rule will also require advisers to comply with the requirement to maintain certain records in accordance with section 203A-2(e)(1)(ii) of the amended rule.
3. The amended rule will require an internet investment adviser to provide investment advice to all of its clients exclusively through an operational interactive website and will  will require advisers registering with the SEC under the exemption to maintain a record demonstrating that the adviser's advisory business has been conducted through an operational interactive website in accordance with the rule.

Please note, the amendments to the Internet Adviser Exemption are designed to modernize the exemption and address technological and other industry developments that have occurred since 2002, and to respond to observations about the use of the exemption that were not available when the exemption was first put in place. According to the SEC, most investment advisers will have filed their annual updating amendments to Form ADV by March 31, 2025 (i.e., 90 days after the December 31, 2024, fiscal year end). An adviser that is no longer eligible to rely on the amended exemption and does not otherwise have a basis for registration with the SEC must register in one or more states and withdraw its registration with the SEC by filing a Form ADV-W by June 29, 2025. 

‍RegComp Financial is a leading national compliance consulting firm with offices in Texas and Florida. To read more about RegComp Financial and its services related to investment adviser compliance, please visit https://www.regcompfinancial.com or call (713) 565-8733.