SEC Proposes Reforms Relating to Investment Advisers Operating Exclusively Through the Internet

On July 26, 2023, the U.S. Securities and Exchange Commission (SEC) has published a press statement to announce an upcoming consultation in connection with the registration eligibility of investment advisers operating exclusively via the internet. Specifically, the SEC seeks to modernize Rule § 275.203A-2 – Exemptions from prohibition on Commission registration to enhance certain protective measures and to remove an exception that is currently available to internet advisers concerning non-internet clients.
Generally speaking, investment advisers are prohibited from registering with the Commission unless they meet certain requirements. Investment advisers solely operating via the internet may be exempt from this prohibition, if they „use of an interactive website to advise clients“, among others. Rule § 275.203A-2 sets forth the conditions that internet investment advisers have to fulfill to be eligible for registration and thus be exempt from the prohibition.
#### The SEC now proposes to modify Rule § 275.203A-2 to:
(1) require internet investment advisers to meet the following key criteria (in addition to some existing ones) for being eligible for registration: The investment adviser must exclusively provide investment advice to ALL of its clients through a functional interactive website on an ongoing basis, whereby the adviser must have more than one client; and
(2) remove the current de minimis exception from the rule which allows internet investment advisers to register with the Commission, even if not all clients advised are internet clients (the current rules stipulates that the adviser may have 15 non-internet clients or less within a twelve month period and still be able to register with the Commission).
The existing eligibility criteria would thereby remain in place, namely that
– the adviser must not be connected through control or common control with another investment adviser that registers with the Commission using a different registration method would remain in place and
– the adviser keeps on record for five years following the filing of Form ADV any proof to verify its eligibility to register with the Commission.
Also, the SEC would make consequential modifications to Form ADV.