[Federal Register Volume 89, Number 69 (Tuesday, April 9, 2024)]
[Rules and Regulations]
[Pages 24693-24713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-06865]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-6578; File No. S7-13-23]
RIN 3235-AN31
Exemption for Certain Investment Advisers Operating Through the
Internet
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is adopting amendments to the rule under the Investment
Advisers Act of 1940 that exempts certain investment advisers that
provide advisory services through the internet (``internet investment
advisers'') from the prohibition on Commission registration, as well as
related amendments to Form ADV. The amendments are designed to
modernize the rule's conditions to account for the evolution in
technology and the investment advisory industry since the initial
adoption of the rule in 2002.
DATES: Effective date: This rule is effective July 8, 2024.
Compliance dates: See section II.E of this release.
[[Page 24694]]
FOR FURTHER INFORMATION CONTACT: Blair B. Burnett, Branch Chief,
Investment Company Regulation Office, Herman Brown, Senior Counsel,
Sirimal R. Mukerjee, Senior Special Counsel, or Melissa Roverts Harke,
Assistant Director, Investment Adviser Regulation Office, Division of
Investment Management, at (202) 551-6787 or [email protected], Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 17
CFR 275.203A-2(e) (``rule 203A-2(e)'' or ``Internet Adviser
Exemption'') under the Investment Advisers Act of 1940 (``Advisers
Act'' or ``Act'') [15 U.S.C. 80b-1 et seq.] and corresponding
amendments to 17 CFR 279.1 (``Form ADV'') under the Advisers Act.\1\
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\1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any section of the Advisers Act, we are referring
to 15 U.S.C. 80b, at which the Advisers Act is codified, and when we
refer to rules under the Advisers Act, or any section of these
rules, we are referring to title 17, part 275 of the Code of Federal
Regulations [17 CFR 275], in which these rules are published.
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Table of Contents
I. Introduction
A. Overview
B. Background
II. Discussion
A. Operational Interactive website
B. Digital Investment Advisory Service
C. Elimination of De Minimis Non-Internet Client Exception
D. Form ADV
E. Compliance Dates
III. Other Matters
IV. Economic Analysis
A. Introduction
B. Baseline and Affected Parties
1. Regulatory Baseline
2. Current Use of the Internet Adviser Exemption
3. Increased Reliance on the Internet Adviser Exemption
C. Benefits, Costs and Effects on Efficiency, Competition, and
Capital Formation
1. Benefits
2. Costs
3. Effects on Efficiency, Competition, and Capital Formation
D. Reasonable Alternatives
1. Allowing Non-Internet Clients
2. Alternative Definitions of ``Interactive website''
3. Eliminating the Internet Adviser Exemption
V. Paperwork Reduction Act
A. Introduction
B. Rule 203A-2(e) Recordkeeping Requirement
C. Form ADV
D. Total Hour Burden Associated With Amendments to Rule 203A-
2(e) and Form ADV
VI. Final Regulatory Flexibility Analysis
A. Need for and Objectives of the Rule and Form Amendments
1. Amendments to Rule 203A-2(e)
2. Amendments to Form ADV
B. Significant Issues Raised by Public Comments
C. Legal Basis
D. Small Entities Subject to the Rule and Rule Amendments
1. Small Entities Subject to Amendments to the Internet Adviser
Rule
E. Projected Reporting, Recordkeeping and Other Compliance
Requirements
1. Amendments to Rule 203A-2(e)
2. Amendments to Form ADV
F. Agency Action To Minimize Effect on Small Entities
I. Introduction
A. Overview
We are adopting amendments to rule 203A-2(e) under the Advisers
Act. The Internet Adviser Exemption provides an exemption from the
prohibition on registration with the Commission that may otherwise
affect certain advisers seeking to register with us. The amendments are
designed to modernize the Internet Adviser Exemption's conditions to
account for the evolution in technology and the investment advisory
industry since the adoption of the rule over 20 years ago.
Specifically, the amendments 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 it relies on the Internet Adviser Exemption. The amendments also
will eliminate the de minimis exception in the current rule that
permits internet investment advisers to have fewer than 15 non-internet
clients in the preceding 12-month period. In addition, we are adopting
amendments to Form ADV to conform certain instructions and definitions
to the amended Internet Adviser Exemption and to require additional
representations regarding an internet investment adviser's reliance on
the rule.
In July 2023, the Commission proposed amendments to the Internet
Adviser Exemption with certain corresponding amendments to Form ADV.\2\
The Commission received eight comments on the proposed amendments.\3\
Most commenters expressed broad support for the proposal while a few
commenters suggested modifications.\4\ One commenter disagreed with the
proposal in its entirety.\5\ After consideration of the comments
received and as discussed in more detail below, we are adopting the
amendments to the Internet Adviser Exemption, as proposed.
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\2\ See Exemption for Certain Investment Advisers Operating
Through the Internet, Investment Advisers Act Release No. 6354 (July
26, 2023) [88 FR 50076 (Aug. 1, 2023)] (``Proposing Release''). See
also Request for Information and Comments on Broker-Dealer and
Investment Adviser Digital Engagement Practices, Related Tools and
Methods, and Regulatory Considerations and Potential Approaches,
Exchange Act Release No. 92766 (Aug. 27, 2021) [86 FR 49067 (Sept.
1, 2021)] (a request for information and comments issued by the
Commission in 2021 on the Internet Adviser Exemption, among other
areas).
\3\ The comment letters on the Proposing Release are available
at https://www.sec.gov/comments/s7-13-23/s71323.htm.
\4\ See e.g., Comment Letter of Better Markets, Inc. (Oct. 2,
2023) (``Better Markets Comment Letter'') (stating that the proposal
was an ``important reform to implement the framework Congress
envisioned for dividing responsibility for regulating investment
advisers between the Commission and the States''); Comment Letter of
North American Securities Administrators Association Inc. (Sept. 29,
2023) (``NASAA Comment Letter'') (stating that it was an opportune
time to revise the exemption's requirements because it shared the
Commission's concern that the exemption has been misused by advisers
that do not meet its requirements); Comment Letter of Andres Giraldo
Suarez (Sept. 28, 2023) (``Suarez Comment Letter'') (stating that
the proposal would modernize the exemption and that it will help
investors get the best service in the digital age). See also infra
section II.
\5\ See Comment Letter of Estelle Brunk (July 29, 2023). This
commenter, however, did not provide a rationale for their
disagreement with the proposal.
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B. Background
The National Securities Markets Improvement Act of 1996 (``NSMIA'')
amended the Advisers Act to divide the responsibility for regulating
investment advisers between the Commission and State securities
authorities.\6\ Congress allocated to State securities authorities the
primary responsibility for regulating smaller advisory firms and
allocated to the Commission the primary responsibility for regulating
larger advisory firms.\7\ Section 303 of NSMIA amended the Advisers Act
to include section 203A \8\ to effect this division of responsibility
by generally prohibiting advisers from registering with the Commission
unless they either have assets under management of not less than $25
million or advise a registered investment company,\9\ and preempt State
adviser statutes regarding registration, licensing, or qualification as
to advisers registered with the Commission.\10\ The ``$25 million
assets
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under management'' test was designed by Congress to distinguish
investment advisers with a national presence from those that are
essentially local businesses.\11\ Congress expressed that its goal in
enacting the statute was more efficiently to allocate the Commission's
limited resources by allowing the Commission to concentrate its
regulatory responsibilities on larger advisers with national
businesses, and to reduce the burden on investment advisers of the
overlapping and duplicative regulation between Federal and State
regulators.\12\ In 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act'') amended certain provisions of the
Advisers Act, including section 203A, to, among other things,
reallocate primary responsibility for oversight of investment advisers
by delegating generally to the States responsibility over certain
``mid-sized'' advisers--i.e., subject to certain exceptions, advisers
with between $25 million and $100 million of assets under
management.\13\
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\6\ National Securities Markets Improvement Act of 1996, Public
Law 104-290, 110 Stat. 3416 (1996) (codified in various sections of
15 U.S.C.). See also Proposing Release at section I.A.
\7\ See S. Rep. No. 293, 104th Cong., 2d Sess. 3-4 (1996)
(``Senate Report''), at 4.
\8\ Public Law 104-290, Sec. 303. See also section 203A of the
Advisers Act [15 U.S.C. 80b-3a].
\9\ Section 203A(a)(1) of the Advisers Act [15 U.S.C. 80b-
3a(a)(1)].
\10\ Section 203A(b) of the Advisers Act [15 U.S.C. 80b-3a(b)].
Advisers prohibited from registering with the Commission remain
subject to the regulation of State securities authorities. Section
222 of the Advisers Act [15 U.S.C. 80b-18a]. The prohibition in
section 203A against registration with the Commission applies to
advisers whose principal office and place of business is in a United
States jurisdiction that has enacted an investment adviser statute.
See Rules Implementing Amendments to the Investment Advisers Act of
1940, Investment Advisers Act Release No. 1633 (May 15, 1997) [62 FR
28112 (May 22, 1997)], at text accompanying note 83.
\11\ See Senate Report at 4-5 (``The states should play an
important and logical role in regulating small investment advisers
whose activities are likely to be concentrated in their home
state.'').
\12\ See Senate Report at 2-4 (stating ``[r]ecognizing the
limited resources of both the Commission and the states, the
Committee believes that eliminating overlapping regulatory
responsibilities will allow the regulators to make the best use of
their scarce resources to protect clients of investment
advisers.'').
\13\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
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Congress has recognized, however, that it is more efficient to
regulate some advisers at the Federal level despite managing less than
the minimum thresholds in assets under management and gave the
Commission authority to enable advisers to register with the Commission
if the prohibition would be ``unfair, a burden on interstate commerce,
or otherwise inconsistent with the purposes of [section 203A].'' \14\
In exercising this authority, the Commission in 2002 adopted the
Internet Adviser Exemption, which relieves certain advisers that
provide investment advisory services primarily through the Internet
from the burdens of multiple State regulation and allows them to
register with the Commission.\15\
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\14\ Section 203A(c) of the Advisers Act [15 U.S.C. 80b-3a(c)].
See also Senate Report at 5 and 15.
\15\ See Exemption for Certain Investment Advisers Operating
Through the Internet, Investment Advisers Act Release No. 2028 (Dec.
12, 2002) [67 FR 77619 (Dec. 18, 2002)], at section I (``2002
Adopting Release''). The exercise of our exemptive authority enables
registration with the Commission and preempts most State law with
respect to the exempted advisers that register with us. See also
rule 203A-2.
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The Internet Adviser Exemption was designed to create a narrow
exemption from the prohibition on registration for certain Internet
investment advisers that otherwise are not eligible for registration
with the Commission, because they do not meet the statutory thresholds
for registration.\16\ These advisers, therefore, ``do not fall neatly
into the model assumed by Congress when it added [s]ection 203A to the
Act to divide regulatory authority over advisers.'' \17\ An adviser
could rely on the Internet Adviser Exemption (as originally adopted)
if, among other obligations, it provided investment advice to all of
its clients exclusively through an interactive website, except it was
permitted to provide investment advice to fewer than 15 clients through
other means during the preceding 12 months.\18\
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\16\ See Proposing Release at section I.A (discussing the
Commission's rationale for providing the Internet Adviser Exemption
in 2002, including, for instance, the recognition that because
Internet investment advisers provide investment advice to their
clients through an interactive website, the adviser's clients can
come from any state, at any time, which, absent the Internet Adviser
Exemption, may result in an Internet investment adviser incurring
the burden of temporarily registering in multiple states and later
withdrawing). See also 2002 Adopting Release.
\17\ 2002 Adopting Release at section II (citing Section
203A(c)).
\18\ See 17 CFR 275.203A-2(e)(1)(i) (``rule 203A-2(e)(1)(i)'').
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The asset management industry has experienced substantial growth
and change since the rule was adopted over 20 years ago. Assets under
management have more than quadrupled since the adoption of the
rule.\19\ Similarly, since the adoption of the rule, advisers are
increasingly using technology to interact with clients, including
through email, websites, mobile applications, investor portals, text
messages, chatbots, and other similar digital platforms.\20\ The use of
technology is now central to how many investment advisers provide their
products and services to clients. For example, the growth of services
available on digital platforms, such as those offered by online
brokerage firms and robo-advisers, has multiplied the opportunities for
investors to invest in and trade securities. This increased
accessibility has been one of the many factors associated with the
increase of retail investor participation in U.S. securities markets in
recent years.\21\ Concomitant with the growth in assets under
management and the broader evolution and adoption of technology in the
investment advisory industry, we have seen an increase in the number of
advisers seeking to rely on the Internet Adviser Exemption.\22\ We
recognize that investment advisers are increasingly using a wide range
of technologies in their businesses. The Internet Adviser Exemption,
however, was intended as a narrow exemption for entities that
exclusively provide investment advice through an interactive
website.\23\
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\19\ There were approximately $23.6 trillion regulatory assets
under management among registered investment advisers as of Dec.
2003 and approximately $114.4 trillion assets under management as of
June 2023. Based on analysis of Form ADV data.
\20\ See Bilal Majbour, Embracing A Digital-Human Model: The
Future of Financial Advisory (June 20, 2023), https://www.forbes.com/sites/forbesbusinesscouncil/2023/06/20/embracing-a-digital-human-model-the-future-of-financial-advisory/?sh=6b27dd457291. See also Andrew Osterland, Technology is
redefining that client-financial advisor relationship (Oct. 14,
2019), https://www.cnbc.com/2019/10/14/technology-is-redefining-that-client-financial-advisor-relationship.html (``Easy-to-use
client portals have become essential to provide investors with the
ability to see their accounts, exchange secure emails with their
advisor and share documents.'').
\21\ See, e.g., Maggie Fitzgerald, Retail Investors Continue to
Jump Into the Stock Market After GameStop Mania, CNBC (Mar. 10,
2021), https://www.cnbc.com/2021/03/10/retail-investor-ranks-in-the-stock-market-continue-to-surge.html (providing year-over-year app
download statistics for Robinhood, Webull, Sofi, Coinbase, TD
Ameritrade, Charles Schwab, E-Trade, and Fidelity from 2018-2020,
and monthly figures for Jan. and Feb. 2021); John Gittelsohn, Schwab
Boosts New Trading Accounts 31% After Fees Go to Zero, Bloomberg
(Nov. 14, 2019), https://www.bloomberg.com/news/articles/2019-11-14/schwab-boosts-brokerage-accounts-by-31-after-fees-cut-to-zero
(noting that Charles Schwab opened 142,000 new trading accounts in
October, a 31% increase over September's pace).
\22\ Based on Form ADV data, the number of advisers relying
exclusively on the exemption has grown from approximately 107
advisers as of Dec. 2015 to 261 advisers as of June 2023. From the
initial adoption of the Internet Adviser Exemption through June
2023, approximately 937 advisers have relied on the exemption as a
basis for registration with the Commission. Of these advisers, 772
initially registered exclusively in reliance on the Internet Adviser
Exemption. The exemption has been used with increasing frequency
recently, with 154 of the 261 advisers relying exclusively on the
exemption registering after 2015.
\23\ See Proposing Release at section I.B. See also 2002
Adopting Release at section II.A.
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While some advisers have used the exemption as intended, others
have used the exemption to register with the Commission while failing
to satisfy the conditions of the exemption.\24\ The
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recent increase in the number of advisers seeking to rely on the
Internet Adviser Exemption coincides with an increase in registration
withdrawals and cancellations of Internet investment advisers, which
has affected the cumulative growth in the number of advisers relying on
the Internet Adviser Exemption.\25\ For example, approximately 67% of
the advisers withdrawing their registration under the rule have done so
since 2017, while only approximately 33% of the withdrawing advisers
did so from the rule's adoption in 2002 through 2016.\26\
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\24\ See Proposing Release at note 26 (stating that the SEC
examination staff observed that ``[n]early half of the [examined]
advisers claiming reliance on the Internet Adviser Exemption were
ineligible to rely on the exemption, and many were not otherwise
eligible for SEC-registration''). See also Observations from
Examinations of Advisers that Provide Electronic Investment Advice
(Nov. 9, 2021), https://www.sec.gov/files/exams-eia-risk-alert.pdf
(``Risk Alert''). Staff documents (including those cited herein)
represent the views of Commission staff and are not a rule,
regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of these documents and,
like all staff statements, they have no legal force or effect, do
not alter or amend applicable law, and create no new or additional
obligations for any person.
\25\ The Commission has cancelled the registration of Internet
investment advisers after finding the firms are no longer in
existence, not engaged in business as an investment adviser, or
prohibited from registering as an investment adviser under section
203A of the Advisers Act (and related rules). The Commission also
has revoked the registration of an Internet investment adviser on
the basis that it was ineligible to rely on the exemption. See In
re. Boveda Asset Management, Inc., Investment Advisers Act Release
No. 6016 (May 6, 2022) (referencing SEC v. Boveda Asset Management,
Inc. and George Kenneth Witherspoon, Jr., 1:21-cv-05321-SCJ (N. D.
GA) (Apr. 27, 2022)). See also Ajenifuja Investments, LLC; Order
Cancelling Registration Pursuant to Section 203(h) of the Investment
Advisers Act of 1940, Investment Advisers Act Release No. 5110 (Feb.
12, 2019) (finding that the adviser was registered as an Internet
investment adviser for over three years and in that time period did
not have an interactive website and did not demonstrate any other
basis for registration eligibility); Strategic Options, LLC; Order
Denying a Request for Hearing and Cancelling Registration Pursuant
to Section 203(h) of the Investment Advisers Act of 1940, Investment
Advisers Act Release No. 5689 (Feb. 24, 2021) (finding that since
its registration in 2015, the registrant has not had, and does not
have, any clients for which it provides investment advice through an
interactive website); In re. RetireHub, Inc., Investment Advisers
Act Release No. 3337 (Dec. 15, 2011) (settled) (alleging that the
adviser was never an Internet investment adviser because, over the
course of its registration, it did not provide investment advice
exclusively through an interactive website, advised more clients
than permitted through personal contact, or both).
\26\ Based on analysis of Form ADV data.
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Our examination staff has observed numerous compliance deficiencies
by advisers relying on the rule.\27\ For example, the staff observed
advisers relying on this exemption that did not have an interactive
website. In addition, the staff observed advisers relying on this
exemption that provided advisory personnel who could expand upon the
investment advice provided by the adviser's interactive website or
otherwise provide investment advice to clients, such as financial
planning, outside of the adviser's interactive website.\28\
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\27\ See Risk Alert.
\28\ Risk Alert at 8 (also finding that some advisers'
affiliates were operating as unregistered investment advisers,
because the affiliates were operationally integrated with the
registered advisers, and the Internet Adviser Exemption prohibited
those affiliates from relying on the Internet investment adviser's
registration as a basis for their own registration).
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As discussed above, the Commission intended the Internet Adviser
Exemption to be a narrow exemption for certain investment advisers that
did not fall neatly within the framework established by Congress to
divide regulatory authority between State regulators and the
Commission.\29\ The amended Internet Adviser Exemption will better
align current practices in the investment adviser industry with this
narrow exemption and will adapt the rule to the broader evolution in
technology and the marketplace that has occurred since the rule was
adopted. In addition, the amendments will enhance investor protection
through more efficient use of the Commission's limited oversight and
examination resources by more appropriately allocating Commission
resources to advisers with a national presence and allowing smaller
advisers with a sufficiently local presence to be regulated by the
States. The amendments also will minimize opportunities for advisers to
rely on the exemption to register with the Commission without meeting
the rule's conditions.
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\29\ See supra notes 16-17.
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II. Discussion
A. Operational Interactive Website
Largely as proposed, we are renaming the defined term ``interactive
website'' as ``operational interactive website,'' and defining it as a
website or mobile application 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).\30\ In a change from the proposal, to keep the
rule evergreen as technology changes, we are also including in the
definition any ``similar digital platform'' through which the
investment adviser provides digital investment advisory services on an
ongoing basis to more than one client.\31\ The current rule defines
``interactive website'' to mean a website in which computer software-
based models or applications provide investment advice to clients based
on personal information each client supplies through the website.\32\
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\30\ See amended 17 CFR 275.203A-2(e)(2) (``rule 203A-
2(e)(2)'').
\31\ See infra note 46 and accompanying text.
\32\ See rule 203A-2(e)(2). Personal information provided by the
internet client generally should consist of information relevant to
the client's financial situation, level of financial sophistication,
investment experience, and financial goals and objectives. See also
Commission Interpretation Regarding Standard of Conduct for
Investment Advisers, Advisers Act Release No. 5248 (June 5, 2019)
[84 FR 33669 (July 12, 2019)] (``Fiduciary Interpretation''), at 12-
14 (discussing an adviser's duty of care, which includes a duty to
provide advice that is in the best interest of the client).
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Most commenters supported the proposed definition of ``operational
interactive website.'' \33\ Another commenter stated that the
definition was ``entirely appropriate'' to protect against clients
being misled by an investment adviser touting itself as Commission-
registered.\34\ Further, a commenter suggested that requiring
investment advisers to maintain an operational website at all times
ensures that ``clients can access the advice and information they need
whenever they want, which is essential in the digital era.'' \35\
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\33\ See, e.g., Better Markets Comment Letter; Suarez Comment
Letter.
\34\ Better Markets Comment Letter.
\35\ Suarez Comment Letter.
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Two commenters did not support this element of the proposal. One
asserted that the requirement that investment advisers have operational
interactive websites would make it harder for smaller entities, because
they tend to have fewer clients.\36\ We carefully considered the
potential impact this change would have on smaller advisers. However,
we are requiring an adviser to have a minimum of only two internet
clients to qualify for the exemption, as proposed.\37\
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\36\ Comment Letter of Robert Martin Comment Letter (Aug. 22,
2023) (``Robert Martin Comment Letter).
\37\ See infra section IV.D.2 (stating that a larger minimum
number of clients may put advisers with a small clientele or
advisers that are at the early stages of starting their advisory
business at a disadvantage). See also infra section VI.B (stating
that advisers with zero or one client are more akin to local
businesses that can be effectively regulated by a State).
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The other commenter stated that the Commission does not need to add
the word ``operational'' to the term ``interactive website'' if the
Commission eliminates the de minimis exception for non-internet clients
and defines ``digital investment advisory service'' as proposed.\38\
This commenter explained that the defined term ``interactive website''
should be sufficient, because a website cannot be interactive if it is
not already operational. As discussed above, EXAMS staff has observed
advisers relying on the exemption without having an operational
interactive
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website.\39\ Therefore, it is important to include the term
``operational'' in the definition of ``operational interactive
website,'' because this addition reinforces the rule's requirement that
an adviser must, at all times during which the adviser relies on the
Internet Adviser Exemption (i.e., at the time of the adviser's
registration and at all times an adviser is registered in reliance on
the amended Internet Adviser Exemption), have an operational
interactive website through which it provides investment advice to more
than one client.
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\38\ NASAA Comment Letter.
\39\ See supra notes 24, 27-28 and accompanying text. See also
notes 25-26 and accompanying text.
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Some commenters suggested modifications to the proposed definition
of ``operational interactive website.'' \40\ In this regard, one
commenter stated that the Commission should modify it by requiring an
investment adviser to provide digital investment advisory services to
at least 15 clients.\41\ This commenter expressed that, in its view, 15
or more clients, rather than the proposed ``more than one,'' is a
better indicator of an adviser's national presence. Although there
could be various ways of demonstrating national presence, in the
context of the Internet Adviser Exemption, the existence of an
operational interactive website that can be accessed by persons located
in multiple States better reflects that the adviser has a national
presence. Requiring a larger minimum number of clients to qualify for
the exemption, such as 15 clients, would be inconsistent with the
general policy objective that underpins the Internet Adviser Exemption.
It would burden advisers that do not fall neatly within the State and
Federal regulatory framework established by Congress with the
obligation of registering in several States before the adviser would be
eligible for Commission registration.\42\
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\40\ See, e.g., NASAA Comment Letter; Robert Martin Comment
Letter.
\41\ Better Markets Comment Letter.
\42\ See infra section IV.D.2.
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Another commenter urged the Commission to provide more clarity
around the meaning of the phrase ``ongoing basis'' within the
definition of ``operational interactive website.'' \43\ An Internet
investment adviser generally is providing investment advice on an
ongoing basis through its website to a client if the advice is within
the scope of the adviser-client relationship.\44\ For example, an
internet investment adviser and a client may come to an express
agreement where the adviser-client relationship is of limited duration,
such as for the provision of a one-time financial plan for a one-time
fee. Following the termination of this adviser-client relationship by
way of the expiration of the agreed duration of the agreement, the
investment adviser generally would not be providing advice to the
former client on an ``ongoing basis'' (absent some other arrangement or
circumstance). Alternatively, an adviser providing comprehensive
discretionary and continual advice to a retail client (e.g., monitoring
and periodically adjusting a portfolio of equity and fixed income
investments with limited restrictions on allocation) generally would be
providing advice to a client on an ``ongoing basis.''
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\43\ Comment Letter of Maksym Puzin (July 28, 2023) (``Maksym
Puzin Comment Letter'').
\44\ See Fiduciary Interpretation at section II.A. (describing
the scope of the adviser-client relationship). Internet investment
advisers, like all registered investment advisers, should consider
the clarity of the descriptions of the investment advisory services
they offer and use reasonable care to avoid creating a false
implication or sense about the scope of those services which may
materially mislead clients. For example, internet investment
advisers should be careful to not imply that their operational
interactive website will provide a comprehensive financial plan for
a client if it will not do so.
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Further, the Proposing Release requested comment on whether to
include ``digital platform'' in the definition of operational
interactive website.\45\ The one commenter addressing this request for
comment specifically did not take a position, expressing, on the one
hand, that more generic terminology could stand up better against
rapidly advancing technology and remain evergreen and, on the other
hand, that a ``whole new medium of investment advice'' would be
significant enough to require refreshing rules.\46\ After further
consideration, the Commission is adding ``similar digital platform'' to
the definition of operational interactive website to recognize that
different types of technologies may develop in the future but to also
reinforce that qualifying technologies must be ones through which an
adviser can provide digital advisory services consistent with the rule.
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\45\ See Proposing Release at section II.A.1.
\46\ NASAA Comment Letter.
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We understand that unforeseen technological issues outside of the
control of an adviser occur at times. We also understand that websites
may be temporarily inoperable due to periodic maintenance to ensure
that the website performs optimally. Accordingly, as proposed, we have
incorporated into the definition of ``operational interactive website''
a hardship clause that allows an internet investment adviser to satisfy
the rule despite temporary technological outages of the operational
interactive website of a de minimis duration.\47\ The amended rule
otherwise specifies that the requirement to provide an operational
interactive website will apply at all times during which the adviser
relies on the Internet Adviser Exemption (i.e., at the time of the
adviser's registration and at all times an adviser is registered in
reliance on the amended Internet Adviser Exemption).\48\ An adviser
intending to rely on the Internet Adviser Exemption may, however, rely
on current rule 203A-2(c) (``120-day rule'') as an initial basis for
registration with the Commission. The 120-day rule allows an adviser
that is not registered with the Commission but has a reasonable
expectation that it will be eligible for registration within 120 days
to register in anticipation of its separate eligibility.\49\ With
advances in technology since the initial adoption of the rule more than
20 years ago, advisers seeking to rely on the Internet Adviser
Exemption may use the 120-day rule to develop, test, and launch an
operational interactive website and obtain initial clients by the time
the 120-day temporary registration expires. Accordingly, like the
current rule, the amended rule has no grace period of its own for
meeting its conditions, including providing an operational interactive
website.\50\
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\47\ internet investment advisers may seek exemptive relief from
the Commission for technological outages of the operational
interactive website that last longer than a de minimis duration. Any
request for an exemptive order will be evaluated based on its
particular facts and circumstances and must meet the standard under
section 206A of the Advisers Act, including that the exemption is
necessary or appropriate in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the Advisers Act.
\48\ In the case of an existing registered investment adviser
seeking to change its registration to rely on the Internet Adviser
Exemption, the adviser will be required to have an operational
interactive website at the time in which it begins relying on the
rule.
\49\ An adviser relying on the 120-day rule must file an
amendment to its Form ADV at the end of the 120 days indicating it
has become eligible for registration or must withdraw its
registration. See Form ADV Part 1A, Item 2.A.(9).
\50\ In order to rely on the Internet Adviser Exemption, a
person must first meet the definition of investment adviser under
the Advisers Act. See section 202(a)(11) of the Advisers Act. Also,
as discussed above, an adviser relying on the Internet Adviser
Exemption must meet the conditions of the rule, which includes
providing investment advice to all of its clients exclusively
through an operational interactive website at all times. See supra
notes 30 and 48 and accompanying text.
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The definition of ``operational interactive website'' is designed
to specify the rule's application to advisers' use of technology,
including their use of mobile applications or similar digital
platforms, in connection
[[Page 24698]]
with their eligibility to rely on the rule. We are adopting this aspect
of the definition largely as proposed with the addition of ``similar
digital platform'' to the definition.\51\ Thus, the definition will
expressly permit an internet investment adviser to use mobile
applications or similar digital platforms to provide investment advice
to clients.\52\ It is appropriate to allow internet investment advisers
using these platforms to interact with advisory clients to rely on the
Internet Adviser Exemption, because clients increasingly access
services, including investment advisory services, through these
platforms,\53\ which can provide interactive functionality similar to
the functionality of websites.\54\ By including mobile applications or
similar digital platforms in the definition of ``operational
interactive website,'' internet investment advisers will have broad
flexibility to design the interactive website in a manner that best
suits their needs and their clients' needs. In addition, the definition
will allow for the evolution of advisers' use of technologies
consistent with the Internet Adviser Exemption. We understand that
these platforms use various methods of communication, including, but
not limited to, push notifications, in-app messages, online client
portal communications, and similar forms of electronic communication.
The amended rule will permit an investment adviser relying on the
Internet Adviser Exemption to provide digital investment advisory
services through any form of mobile application technology or similar
digital platform.
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\51\ See supra note 31 and accompanying text.
\52\ The term ``mobile application'' generally, refers to a
software application developed primarily for use on wireless
computing devices, such as smartphones and tablets. See, e.g.,
techopedia, Mobile Application (Mobile App) (Aug. 7, 2020), https://www.techopedia.com/definition/2953/mobile-application-mobile-app
(``techopedia'').
\53\ See Sarah Perez, Majority of Digital Media Consumption Now
Takes Place in Mobile Apps, TechCrunch (Aug. 21, 2014) (``[M]obile
apps [. . .] eat up more of our time than desktop usage or mobile
web surfing, accounting for 52% of the time spent using digital
media. Combined with mobile web, mobile usage as a whole accounts
for 60% of time spent, while desktop-based digital media consumption
makes up the remaining 40%.''). See generally, Hannah Glover,
`Healthy Paranoia' Drives Innovation at Vanguard (June 17, 2016),
https://www.ignites.com/c/1385943/158263?referrer_module=searchSubFromFF&highlight=%22mobile%20applications%22 (``Next on the horizon is mobile applications. When you
travel [outside of the United States], you see how PC-centric
technology does not exist anywhere else[.] In the future, [. . .
[i]t's going to be all about the phone. Companies without easy-to-
use, yet powerful, apps will be left behind [. . . .]'') (internal
quotations omitted).
\54\ See, e.g., techopedia (``Mobile applications frequently
serve to provide users with similar services to those accessed on
PCs.''); Fundfire, What Are Major IT Trends in Wealth Mgmt? (Oct.
15, 2012), https://www.fundfire.com/c/422571/47531?referrer_module=searchSubFromFF&highlight=%22mobile%20applications%22(``Dedicated mobile applications for smartphones and tablets
can enable unified digital communication between advisors and their
clients--a combination of email, chat, voice and video.'').
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B. Digital Investment Advisory Service
We are adopting the definition of ``digital investment advisory
service,'' as proposed. The amendments will define ``digital investment
advisory service'' to mean investment advice to clients that is
generated by the operational interactive website's software-based
models, algorithms, or applications based on personal information each
client supplies through the operational interactive website. The
definition is designed to require that, as under the current rule, an
adviser must provide investment advice exclusively through an
interactive website.
Most commenters generally supported the defined term ``digital
investment advisory service.'' \55\ One commenter asserted that it was
appropriate to define the exemption narrowly to apply to firms whose
investment advice is technologically rendered.\56\ The same commenter
requested that the Commission provide clarity, within the rule text
itself, that personnel of the adviser cannot expand upon
technologically generated advice but can answer other questions and
help clients navigate the website or application.
---------------------------------------------------------------------------
\55\ See, e.g., Better Markets Comment Letter; NASAA Comment
Letter.
\56\ NASAA Comment Letter.
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Advisers are increasingly using algorithms to generate investment
advice in order to provide clients with cost-effective and tailored
advice and the definition encompasses this use.\57\ The amendments will
specify that, to qualify for the exemption, the investment advice to
clients must be ``generated by'' the website's software-based models,
algorithms, or applications.\58\ Like the current rule, this definition
is designed so that an adviser's personnel do not generate, modify, or
otherwise provide client-specific investment advice through the
operational interactive website or otherwise.\59\ Human-directed
client-specific investment advice, even if delivered through electronic
means, would not be eligible activity under the Internet Adviser
Exemption.
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\57\ See, e.g., Investment Adviser Association, 2020 Evolution
Revolution (2020), at 8 (noting that by 2020, ``two of the top five
advisers as measured by number of non-high net worth individual
clients served [were] digital advice platforms, representing 7.5
million clients, an increase of 2.7 million clients from [the prior
year].''); Akin Ajayi, The Rise of the Robo-Advisers (July 16, 2015)
(``Robo-advisers--to use the suitably futuristic moniker adopted as
a description for these services--are investment services driven by
automated customer service and an investment strategy governed by
computer algorithms. A clutch of start-ups, largely located in the
United States but spreading to Europe and Asia, have emerged over
the last few years.'').
\58\ As a fiduciary, investment advisers have a duty to make
full and fair disclosure of all material facts and conflicts of
interest to, and to employ reasonable care to avoid misleading,
clients. Given the unique aspects of internet investment advisers'
business models and because client relationships may occur with
limited, if any, human interaction, internet investment advisers
generally should consider the most effective way to communicate to
their clients the limitations, risks, and operational aspects of
their advisory services. For example, internet investment advisers
generally should effectively disclose to clients, among other
matters, that an algorithm is used to manage individual client
accounts with a description of the particular risks inherent in the
use of an algorithm to manage client accounts. In addition, internet
investment advisers generally should consider whether such
disclosures are presented prior to client sign-up so that
information necessary to make an informed investment decision is
available to clients before they engage. Finally, an adviser should
carefully consider whether its disclosure is sufficiently specific
so that a client is able to understand the material facts or
conflicts of interest and make an informed decision whether to
provide consent. See Fiduciary Interpretation.
\59\ See 2002 Adopting Release at section II.A.1 (stating that
the exemption is for advisers that provide investment advice to all
of their clients `exclusively' through their interactive websites
and that these advisers may not use their advisory personnel to
elaborate or expand upon the investment advice provided by its
interactive website, except as permitted by the de minimis
exception).
---------------------------------------------------------------------------
The amendments will not prohibit advisory personnel from all
interactions with advisory clients, however. Consistent with the
current rule, advisory personnel generally can continue to assist
clients with technical issues or collect feedback in connection with
the use of the website (e.g., accessing the website), including by
assisting clients with explanations of how the algorithm generating the
investment advice was developed or operates. Advisory personnel
generally should be able to perform those services telephonically,
through email, live electronic chats, and similar forms of electronic
communication. Continuing to provide this guidance, rather than
changing the rule as suggested by a commenter,\60\ is appropriate in
light of the breadth of services offered to investors through advisers'
interactive websites and our administration of the current rule. This
approach also is consistent with the Commission's approach in the 2002
Proposing Release and the 2002 Adopting Release.\61\
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\60\ NASAA Comment Letter.
\61\ See Exemption for Certain Investment Advisers Operating
Through the Internet, Investment Advisers Act Release No.2028 (Apr.
12, 2002) [67 FR 19500 (Apr. 19, 2002)] (``2002 Proposing
Release''), at section II; 2002 Adopting Release at section II.A.1.
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[[Page 24699]]
C. Elimination of De Minimis Non-Internet Client Exception
We are eliminating the de minimis exception that permits an
Internet investment adviser to provide investment advice to fewer than
15 non-internet clients during the preceding 12 months, as
proposed.\62\ As a result, an Internet investment adviser must provide
advice to all of its clients exclusively through an operational
interactive website.
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\62\ See amended rule 203A-2(e)(1)(i).
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Most commenters broadly supported the elimination of the de minimis
exception.\63\ One commenter stated that eliminating the de minimis
exception for non-internet clients would remove the possibility that
some advisers are servicing clients directly and personally, while
ignoring their obligation to provide advice through an interactive
website.\64\ One commenter, however, expressed concern that the
elimination of the de minimis exception would constrain the growth
potential, quality, and usefulness of internet-based services, because
the rule would no longer permit human interaction to enhance the
quality and reliability of fully automated, internet-based
services.\65\
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\63\ See, e.g., NASAA Comment Letter; Suarez Comment Letter;
Better Markets Comment Letter.
\64\ See NASAA Comment Letter.
\65\ Comment Letter of Anonymous (Oct. 2, 2023) (``Anonymous
Comment Letter'').
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In considering whether to retain the de minimis exception, we took
into account the basis for it as well as the Commission's experience
administering the rule. The Internet Adviser Exemption was adopted for
advisers that provide investment advice to their internet clients
``exclusively'' through their interactive website, but it was adopted
at a time when providing advice in this manner was still in a fairly
nascent stage.\66\ Accordingly, the Commission initially adopted the de
minimis exception so that internet investment advisers would not lose
their ability to rely on the Internet Adviser Exemption as a result of
providing advice to a small number of clients through means other than
an interactive website. The Internet Adviser Exemption was not designed
\67\ to permit human interaction more broadly, however.\68\ In
addition, the de minimis exception is no longer needed in light of the
widespread use of the internet, the relative ease of building and
maintaining a website and applications, and other technological
advances that better allow advisers to monitor to whom their advice is
being provided. Accordingly, the elimination of the de minimis
exception better reflects the allocation of regulatory responsibility
between the Commission and the States. Eliminating the de minimis
exception also will allow the Commission more effectively to identify
advisers claiming reliance without meeting the requisite conditions of
the rule (i.e., providing investment advice to all clients exclusively
through an operational interactive website). To the extent advisers
have non-internet clients, these advisers may register with the States
or rely on another basis for registration with the Commission, as
appropriate.
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\66\ 2002 Adopting Release at section II.A.1.
\67\ 2002 Adopting Release at section I. When the Commission
initially adopted the fewer than 15 client de minimis exception, the
Commission stated that it was similar to the (since repealed)
``private adviser exemption'' which, subject to certain additional
conditions, exempted from the requirement to register with the
Commission any adviser that during the course of the preceding 12
months, had fewer than 15 clients. That exemption was repealed by
section 403 of Dodd-Frank. See Rules Implementing Amendments to the
Investment Advisers Act of 1940, Investment Advisers Act Release No.
3221 (June 22, 2011) [76 FR 42949 (July 19, 2011)]. See also 2002
Proposing Release, at section II. In the 2002 Proposing Release, the
Commission proposed permitting an adviser to rely on the exemption
so long as at least 90% of the adviser's clients obtained their
investment advice exclusively through the interactive website (``90%
test''). In light of comments stating that the 90% test would permit
more than a de minimis number of non-internet clients, the
Commission replaced the 90% test with a provision permitting an
adviser relying on the rule to have fewer than 15 non-internet
clients during the course of the preceding 12 months.
\68\ See supra section II.B (stating that advisory personnel can
continue to assist clients with technical issues in connection with
the use of the website, including by assisting clients with
explanations of how the algorithm generating the investment advice
was developed or operates). Accordingly, the elimination of the de
minimis exception should not decrease quality and reliability of
fully automated, internet-based services and, in turn, should not
constrain the growth potential, quality, and usefulness of internet-
based services, as suggested by a commenter.
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D. Form ADV
We are amending Form ADV, as proposed. The amendments to Form ADV
will require an investment adviser relying on the exemption as a basis
for registration to represent on Schedule D of its Form ADV that, among
other things, it has an operational interactive website.\69\ As noted
above, there has been an increase in the number of registration
withdrawals and cancellations of Internet investment advisers.\70\ Many
of these withdrawals and cancellations were a result of the adviser not
having an operational interactive website.
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\69\ Consistent with the definition of operational interactive
website, the amendments will also require an adviser that is relying
on the rule to represent that it will provide investment advice on
an ongoing basis to more than one client exclusively through an
operational interactive website.
\70\ See supra notes 25-26 and accompanying text.
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Most commenters broadly supported the amendments to Form ADV.\71\
One commenter, however, suggested that the Commission remove the
proposed representation on Form ADV generally, because Form ADV Part 1A
Item 2.A(11) already asks an investment adviser to indicate whether it
is relying on the exemption, and an adviser that mistakenly or falsely
selects ADV Part 1A Item 2.A(11) is already susceptible to an
examination deficiency finding or an enforcement action.\72\ The same
commenter stated that ``singling out one of the [e]xemption
requirements could give the impression that it is somehow more
important, which could unintentionally cause advisers to neglect the
[e]xemption's other requirements.'' \73\ Another commenter expressed
concern that Form ADV may become too lengthy as a result of the
proposed amendments.\74\
---------------------------------------------------------------------------
\71\ See, e.g., Better Markets Comment Letter; Suarez Comment
Letter.
\72\ NASAA Comment Letter.
\73\ Id.
\74\ See Robert Martin Comment Letter.
---------------------------------------------------------------------------
The amendments to Form ADV will help ensure that registrants are
aware of the new ``operational interactive website'' requirement and
avoid erroneous registrations. The amendments also will require
Internet investment advisers, as an initial matter and periodically
thereafter, to provide an additional representation on Form ADV that
more clearly notes the requirements of the exemption. In addition, the
existing form has not reduced the number of advisers erroneously
relying on the exemption. While we appreciate commenters' concerns
regarding the existing form and adding length to the form, it is
important to aid registrants with understanding and reinforcing the
conditions of the Internet Adviser Exemption.\75\ The amendments to
Form ADV will also aid Commission staff in administering the adviser
registration process.
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\75\ In our experience, registrants generally seek to follow
registration requirements. Therefore, we disagree that the proposed
representation on Form ADV would cause advisers to neglect the
rule's other requirements, as suggested by the commenter. See NASAA
Comment Letter. In addition, the benefits of aiding registrants with
understanding and reinforcing the conditions of the Internet Adviser
Exemption justify any costs in this regard.
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[[Page 24700]]
E. Compliance Dates
The compliance date for the amended rule is March 31, 2025. An
adviser relying on the amended Internet Adviser Exemption must comply
with the rule's conditions, including the condition to maintain the
filing of a Form ADV that includes a representation that the adviser is
eligible to register with the Commission under the Internet Adviser
Exemption (the ``Form ADV representation''), by the rule's compliance
date. The compliance date reflects the date for which most investment
advisers will have filed their annual updating amendments to Form ADV
(i.e., 90 days after the December 31, 2024 fiscal year end).\76\
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\76\ Our staff is working closely with FINRA, our Investment
Adviser Registration Depository (``IARD'') contractor, to re-program
IARD and we understand that the system is expected to be able to
accept filings of Form ADV reflecting the Form ADV representation by
Sept. 30, 2024. Advisers not filing an annual updating amendment
between Sept. 30, 2024, and Mar. 31, 2025, must file an other than
annual amendment updating Form ADV by Mar. 31, 2025. See also infra
notes 158-162.
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An adviser that is no longer eligible to rely on the amended
Internet Adviser Exemption and does not otherwise have a basis for
registration with the Commission, must register in one or more States
and withdraw its registration with the Commission by filing a Form ADV-
W \77\ by June 29, 2025, 90 days after the rule's compliance date.
After the end of this period, the Commission expects to cancel the
registration of advisers no longer eligible to register with the
Commission that fail to withdraw their registrations.\78\
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\77\ 17 CFR 279.2.
\78\ See section 203(h) of the Advisers Act. As provided in the
Advisers Act, an adviser would be given appropriate notice and
opportunity for hearing to show why its registration should not be
cancelled. Section 211(c) of the Advisers Act.
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III. Other Matters
Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated the final amendments as not a
``major rule'' as defined by 5 U.S.C. 804(2). If any of the provisions
of these rules, or the application thereof to any person or
circumstance, is held to be invalid, such invalidity shall not affect
other provisions or application of such provisions to other persons or
circumstances that can be given effect without the invalid provision or
application.
IV. Economic Analysis
A. Introduction
We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 202(c) of the Advisers Act provides that when
the Commission is engaging in rulemaking under the Act and is required
to consider or determine whether an action is necessary or appropriate
in the public interest, the Commission shall also consider whether the
action will promote efficiency, competition, and capital formation, in
addition to the protection of investors.\79\ The following analysis
considers the likely significant economic effects that may result from
the amended rule to rules and forms, including the benefits and costs
to clients and investors and other market participants as well as the
broader implications of the amended rule for efficiency, competition,
and capital formation.
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\79\ 15 U.S.C. 80b-2(c).
---------------------------------------------------------------------------
Where possible, the Commission quantifies the likely economic
effects of its amended rules. However, the Commission is unable to
quantify certain economic effects because it lacks the information
necessary to provide estimates or ranges of costs. For instance, data
that separately captures the number of non-internet clients or the
types of internet clients an adviser has is generally unavailable.\80\
The Proposing Release requested any of such available data, but
received no data or estimates from the commenters. Further, in some
cases, quantification would require numerous assumptions to forecast
how investment advisers and other affected parties would respond to the
amended rule, and how those responses would in turn affect the broader
markets in which they operate. In addition, many factors determining
the economic effects of the amended rule would be investment adviser-
specific. Investment advisers vary in size and sophistication, as well
as in the products and services they offer. Even if it were possible to
calculate a range of potential quantitative estimates, that range would
be so wide as to not be informative about the magnitude of the benefits
or costs associated with the amended rule. Many parts of the discussion
below are, therefore, qualitative in nature. As described more fully
below, the Commission is providing a qualitative assessment and, where
practicable, a quantified estimate of the economic effects.
---------------------------------------------------------------------------
\80\ Information on number of clients, such as that described
supra section I.B., is generally developed during adviser
examinations.
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B. Baseline and Affected Parties
The final rule will amend the definitions used in the existing
Internet Adviser Exemption, which allows internet investment advisers
to register with the Commission. The application of this exemption,
along with other applicable rules, determines which advisers the
Commission regulates and which advisers may fall under State
regulation. The entities potentially affected by the amended rule
include all advisers that are currently relying on the Internet Adviser
Exemption, or are contemplating relying on the Internet Adviser
Exemption; their clients and affiliated parties; and users of Form ADV
data.
1. Regulatory Baseline
NSMIA divided regulatory responsibility for advisers between the
Commission and the States, where larger advisers with national presence
are regulated by the Commission and smaller advisers with sufficient
local presence are regulated by the States.\81\ Subject to certain
exemptions, only advisers that advise a registered investment company
or have assets under management above $100 million are allowed to
register with the Commission.\82\ All other advisers may be subject to
State regulation and may be required to register with one or multiple
States.\83\
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\81\ See supra section II.
\82\ Section 203A(a)(2)(A) and (B) of the Advisers Act provides
that an adviser is required to register with the Commission if the
adviser has $25 million or more in assets under management and is
not subject to examination as an adviser by the State where it
maintains its principal office and place of business.
\83\ See supra note 16 and accompanying text.
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However, section 222(d) of the Advisers Act [15 U.S.C. 80b-18a(d)]
establishes a ``national de minimis standard'' before a State can
require an adviser to register with its securities commissioner. Under
section 222(d) of the Advisers Act, States are preempted from requiring
an adviser to register with its securities commissioner, if the adviser
(1) does not have a place of business located within the State and (2)
has had fewer than six clients who are residents of that State during
the preceding 12-month period. State law varies, and States may choose
to exempt from State regulation certain advisers with a place of
business in that State if the adviser has a sufficiently low number of
clients.\84\ Depending on the
[[Page 24701]]
location of the adviser and the number and location of its clients, an
adviser not eligible for Commission registration might need to register
with no State, or with up to 14 States.\85\ States may also require
advisers to file copies of their Commission filings with the State
(notice filings) even if State registration is not required.\86\
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\84\ See, e.g., N.Y. Gen. Bus. Law sec 359-eee(a)(5) (excluding
from the definition of ``investment adviser'' a person that has sold
investment advisory services to fewer than 6 persons in the State,
in the preceding 12 months); N.J. Stat. Ann. sec 49:3-56.9(g)(1)
(exempting from registration as an investment adviser a person that
does not have more than 5 clients in the State, in a 12-month
period); Ill. Admin. Code tit. 14 sec 130.805(b) (exempting from
registration as an investment adviser any investment adviser that
had no more than 5 clients in the State, in the preceding 12
months); Ga. Comp. R. & Regs. R. 590-4-4-.13(1)(b) (exempting from
registration an investment adviser that had fewer than 6 clients in
the State, in the preceding 12 months).
\85\ Advisers that would otherwise have to register with 15 or
more states may register with the Commission using an existing
exemption under 17 CFR 275.203A-2(d) (``multi-state exemption''). An
investment adviser relying on the multi-state exemption would not be
eligible for that exemption until the adviser had obtained the
requisite number of clients in 15 states to trigger its registration
obligations in those states. Under the rule, an investment adviser
relying on this exemption must represent that it has reviewed its
obligations under State and Federal law and has concluded that it is
required to register as an investment adviser with the securities
authorities of at least 15 states. For information on the number of
State-registered investment advisers, see, e.g., NASAA, NASAA 2023
Investment Adviser Section Annual Report, https://www.nasaa.org/wp-content/uploads/2023/09/2023-IA-Section-Report-FINAL.pdf.
\86\ 15 U.S.C. 80b-3a note [Pub. L. 104-290, section 307,
``Continued State Authority'']. See, e.g., Neb. Rev. St. sec. 8-
1103(2)(b); N.H. Rev. Stat. sec. 421-B:4-405; 7 TX Admin. Code sec
116.1.(b)(2).
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Certain exemptions allow advisers to register with the Commission
if State registration becomes unfair, a burden on interstate commerce,
or otherwise inconsistent with the purposes of section 203A of the
Act.\87\ The multistate exemption is one such exemption: it allows
advisers that would otherwise have to register with 15 or more States
to register with the Commission instead.\88\ The current Internet
Adviser Exemption similarly allows Commission registration for advisers
that conduct their business predominantly over the internet and by the
nature of their business have national presence. That is, their clients
may come from multiple States, but they may not advise a registered
investment company or have sufficient assets under management to be
able to register with the Commission. To alleviate the burden of
potentially registering with numerous States for business conducted
over the internet, the Commission created in 2002 the exemption found
in rule 203A-2(e).\89\ Under current 17 CFR 275.203A-2(e)(1),
Commission registration is allowed for an investment adviser that
provides advice to all of its clients exclusively through an
interactive website, except that the investment adviser may provide
investment advice to fewer than 15 clients through other means during
the preceding 12 months. Current rule 203A-2(e) also requires the
internet investment adviser to maintain records demonstrating that it
meets the conditions of rule 203A-2(e)(1)(i).\90\
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\87\ 15 U.S.C. 80b-3a(c).
\88\ See 17 CFR 275.203A-2(d). See also 2002 Adopting Release
and supra note 85.
\89\ See 2002 Adopting Release and the relevant discussion in
section I.A of this release. The 2002 Adopting Release described the
exemption as ``providing relief to certain investment advisers who,
unlike State-registered advisers, have no local presence and whose
advisory activities are not limited to one or a few states.'' At
that time, the threshold for the multi-state exemption was
registration in 30 states rather than 15.
\90\ See 17 CFR 275.203A-2(e)(1)(ii) (``rule 203A-
2(e)(1)(ii)''); relevant discussion supra section II.
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2. Current Use of the Internet Adviser Exemption
As of June 2023, there were 15,391 registered investment advisers
with $114,430 billion regulatory assets under management. Of these, 261
(1.70%) with a combined total of $1.09 billion in regulatory assets
under management (0.001%) exclusively relied on the Internet Adviser
Exemption. An additional 10 advisers were dually registered with the
Commission under both the Internet Adviser Exemption and another basis
for registration. The total number of advisers claiming use of the
Internet Adviser Exemption was 271, of which 197 were investment
advisers with less than $25 million in regulatory assets under
management.\91\
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\91\ The data is based on the analysis of Form ADV data for the
reporting period ending June 2023.
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As of June 2023, registered internet investment advisers had on
average 5,347 clients, with a minimum of 0 clients, reported by 107
advisers, and a maximum of 522,345 clients.\92\ The median number of
clients for all advisers using the exemption was 5, indicating that the
distribution is highly skewed. As of June 2023, 107 advisers (39% of
271) reported advising 0 clients, 5 advisers (2% of 271) reported
advising 1 client, and 38% of internet investment advisers (102 of 271)
advised 2 to 100 clients. Only 17 advisers (6% of 271) reported
advising more than 5,000 clients. Figure 1 demonstrates that 41% of
internet advisers have fewer than 2 clients.
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\92\ The data is based on the analysis of Form ADV data for the
reporting period ending June 2023.
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[[Page 24702]]
Figure 1: Number of Clients Reported by Internet Advisers
[GRAPHIC] [TIFF OMITTED] TR09AP24.002
The largest categories of clients that internet investment advisers
currently have are: non-high net worth individuals, pension plans, and
high net worth individuals.\93\ The distribution of these client types
among all internet advisers is as follows:
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\93\ The instructions of Form ADV specify that the category
``individuals'' includes trusts, estates, and 401(k) plans and IRAs
of individuals and their family members but does not include
businesses organized as sole proprietorships. ``High Net Worth
Individual'' is defined as an individual who is a qualified client
or who is a ``qualified purchaser'' as defined in section
2(a)(51)(A) of the Investment Company Act of 1940.
Table 1--Largest Categories of Clients: Distribution Across All Internet
Advisers
------------------------------------------------------------------------
Mean
clients
Type of client per
adviser
------------------------------------------------------------------------
Non-high net worth individuals.............................. 4,955
Pension plans............................................... 256
High net worth individuals.................................. 1
------------------------------------------------------------------------
Data source: Form ADV data for the reporting period ending June 2023.
The low median, relative to the average, is an indication of skewed
distribution within the population of internet advisers. If the dataset
is reduced to only those 214 advisers with 100 or fewer clients, the
distribution of clients in these categories is as follows:
Table 2--Largest Categories of Clients for Internet Advisers With 100 or
Fewer Clients
------------------------------------------------------------------------
Mean
clients
Type of client per
adviser
------------------------------------------------------------------------
Non-high net worth individuals.............................. 6.1
Pension plans............................................... 0.1
High net worth individuals.................................. 0.8
------------------------------------------------------------------------
Data source: Form ADV data for the reporting period ending June 2023.
The data indicate that the majority of clients using internet
advisers are non-high net worth individuals.
We do not have information on the States in which these clients are
located. Advisers using the internet Adviser Exemption might also be
eligible for the multistate exemption if they have clients in 15 or
more States.\94\ But, we
[[Page 24703]]
would expect that relatively few advisers with the option to use either
exemption would choose the Internet Adviser Exemption instead of the
multi-state exemption, because the multi-state exemption is less
restrictive: it does not limit advice provided through non-internet
means, as the Internet Adviser Exemption does. This suggests that
advisers using the Internet Adviser Exemption most likely do not have
the option of using the multi-state exemption instead. The Proposing
Release invited public comment on this topic but received no comments
on the matter.
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\94\ The multistate exemption became more widely available after
the creation of the current Internet Adviser Exemption, because of
the change from a minimum of 30 states to a minimum of 15. Thus, the
burden of registering in numerous states has lessened, compared to
what it had been when the current exemption was developed.
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Similarly, we cannot estimate how many advisers currently using the
Internet Adviser Exemption would potentially be subject to regulation
by multiple States if they did not elect to use the exemption. State
law varies, and regulation would depend on the location of the
adviser's place of business and the location of their clients.\95\ In
light of the substantial number of internet investment advisers with
only a few clients, however, it is likely that many of the advisers
currently relying on the exemption would, if not registered using the
exemption, be subject to registration in at most one State.\96\
Additionally, advisers now may be able to use technology and targeted
advertisement in such a way as to better control in which States they
may be required to register, thereby reducing the State regulation
burden.\97\
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\95\ For example, the Uniform Securities Act would, if adopted
by the relevant State, require an investment adviser to register
with the State unless the adviser has no place of business in the
State and no more than five clients in the State other than certain
types of clients described in the Uniform Securities Act. Unif. Sec.
Act of 2002 (rev. 2005), sec. 403(b). As of Feb. 2024, 21 states and
territories had adopted the 2002 version of the Uniform Securities
Act and 5 states had adopted an earlier version. 2002 Securities Act
Enactment History, Unif. Law Comm'n, https://www.uniformlaws.org/committees/community-home?CommunityKey=8c3c2581-0fea-4e91-8a50-27eee58da1cf, last visited Feb. 21, 2024.
\96\ The 2002 rule contemplated internet advisers potentially
having clients that ``can come from any State, at any time, without
the adviser's prior knowledge'' and thus potentially necessitating
registration in all states. 2002 Adopting Release at 77622. However,
the significant number of currently registered internet investment
advisers with one or fewer clients would not face that risk.
Additionally, as noted in the Proposing Release at note 69, today's
investment advisers are better able to control in which states they
may be required to register.
\97\ See Proposing Release at II.A.2.
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In the instances where State law does not require the adviser to
register with a State, for example because the adviser has fewer than
the de minimis number of clients in the State, registration with the
Commission represents an additional compliance burden that some
internet investment advisers appear to be voluntarily assuming.
Moreover, where State law would require a Commission-registered adviser
to make notice filings with one or more States, the combination of
Commission registration and State notice filings may also represent an
additional, voluntarily assumed compliance burden as compared to
registering directly with those States.\98\ Because some advisers
choose to register with the Commission despite the potential additional
compliance burden, we assume that some advisers perceive value in
Commission registration as compared to State registration. We received
no comments about this assumption.
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\98\ The cost of notice filing is often the same as the cost of
registering with the State. See Investment Adviser Registration
Depository, IA Firm State Registration/Notice Filing Fee Schedule
(Jan. 1, 2024), https://www.iard.com, under the tab ``Fees &
Accounting.'' We invited public comment on the cost of State
registration and notice filing fees, but did not receive comment on
this topic.
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Based on observations of Commission staff conducting examinations,
we think some investors may believe that registration with the
Commission confers a reputational advantage or appeals to potential
clients. Other possibilities include the intent to obtain clients in
multiple States in the future, or avoidance of individual State
registration requirements such as bond and invoicing requirements. We
did not receive comment letters regarding the matters discussed above.
3. Increased Reliance on the Internet Adviser Exemption
Use of the Internet Adviser Exemption has increased since its
adoption, especially in recent years.\99\ The number of investment
advisers using the exemption as of June 2023 (that is, 271 advisers)
was almost 18 times larger than it was in December 2003, one year after
the exemption was put in place, when there were 15 such advisers.\100\
The value of regulatory assets under management for advisers
exclusively relying on the Internet Adviser Exemption as of June 2023
was $1.09 billion,\101\ or 0.001% of total adviser registered assets
under management. The average regulatory assets under management per
adviser for internet investment advisers (about $56.09 million) was 144
times larger than it was in December 2003 when advisers using the
exemption had on average about $0.39 million of registered assets under
management per adviser. Further, from 2003 to 2023, 474 unique
registered investment advisers that had indicated in their prior ADV
filing they were utilizing the internet adviser registration basis
withdrew and filed a total of 514 Forms ADV-W.\102\ Note that the
number of withdrawals has increased, for example, there were 69 Form
ADV-W filings by internet investment advisers between 2003 and 2012 and
445 ADV-W filings between 2013 and June 2023.\103\ This increase could
suggest erroneous registration, as discussed later in this analysis.
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\99\ See supra note 22 (number of advisers relying exclusively
on the exemption grew from 107 in 2015 to 261 in 2023).
\100\ The 2002 Adopting Release used a figure of 20 eligible
advisers in its analysis, acknowledging that the number of eligible
firms would likely grow. 2002 Adopting Release at 77623.
\101\ Accounting for inflation using the Bureau of Labor
Statistics' Consumer Price Index inflation calculator (https://www.bls.gov/data/inflation_calculator.htm), this number is 0.68
billion in Dec. 2003 dollars.
\102\ The filing of 475 Forms ADV-W includes singular investment
advisers that utilized the internet Adviser Exemption on a non-
continuous basis (e.g., investment advisers that registered,
withdrew, registered again, and subsequently withdrew).
\103\ Based on analysis of Form ADV data for the reporting
period ending June 2023.
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Technology use in the advisory industry has also changed. One
commenter wrote that since the Commission adopted the Internet Adviser
Exemption in 2002, there has been an increased use of technology by
internet advisers to provide investment advice including through
interactive websites, mobile applications, investor portals, text
messages, chatbots, and robo-advisers.\104\ While the 2002 Adopting
Release stated that internet investment advisers might not be fully
operational within 120 days of registration,\105\ today websites and
associated services are more common, more website development services
are available on the market, and new technologies, such as mobile
applications that can generate advice, have emerged as well.\106\
Currently, different options are available on the market to develop a
website, from using website builder programs for an average upfront
cost of about $200 and maintenance cost of about $50 per month, to
hiring a website designer for an average upfront cost of about $6,000
[[Page 24704]]
and maintenance cost of about $1,000 per year.\107\
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\104\ See Better Markets Comment Letter.
\105\ 2002 Adopting Release at 77622.
\106\ See supra note 20 and surrounding text. See also Alex
Padalka, RIAs Depend on Tech for Client Communications, Growth, Fin.
Advisor IQ (Dec. 10, 2021), https://www.financialadvisoriq.com/c/3402044/435734/rias_depend_tech_client_communications_growth?preview=1.
\107\ These estimates are available from Lucy Carney, How Much
Does a Website Cost in 2024? (Full Breakdown), WebsiteBuilderExpert
(updated Sept. 20, 2023), https://www.websitebuilderexpert.com/building-websites/how-much-should-a-website-cost/. None of the
commenters expressed an opinion or provided an estimate on the costs
of developing a website.
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As discussed in section I.B., the Commission adopted rule 203A-2(e)
to alleviate, for a narrow set of advisers with national presence, the
burden of having to register in multiple States as a result of
providing advice primarily through the internet. The increase in its
use, especially among advisers that would not be subject to
registration in more than one State, or that appear to have advised no
clients in several years, suggests the exemption may currently be used
in ways that were not intended by the 2002 rule.
In addition, the Commission's examination program has identified
multiple instances of compliance issues relating to advisers relying on
the exemption without an interactive website, or providing advisory
personnel who could expand upon the investment advice provided by the
adviser's interactive website or otherwise provide investment advice to
clients, such as financial planning.\108\ Consistent with these
observations, one commenter noted that some investment advisers were
attempting to rely on the Internet Adviser Exemption to register with
the Commission without having a national presence.\109\ The frequency
of registration withdrawals has increased as well: as discussed
previously in the baseline, the number of withdrawals by internet
investment advisers between 2013 and 2023 (445) was over five times
larger than the number of withdrawals between 2003 and 2012 (69).\110\
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\108\ See Risk Alert. See also supra note 25 and surrounding
text.
\109\ See Better Markets Comment Letter.
\110\ Based on analysis of Form ADV data for the reporting
period ending June 2023.
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C. Benefits, Costs and Effects on Efficiency, Competition, and Capital
Formation
1. Benefits
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.\111\ Further, as discussed
in more detail below, the final changes to the definitions in the rule
are designed to better align regulatory authority between the
Commission and the States and improve investor protection. The amended
rule will:
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\111\ See supra section I.B for a relevant discussion.
---------------------------------------------------------------------------
1. Specify that the exemption is available to an investment adviser
that provides investment advice to all of its clients exclusively
through an operational interactive website at all times during which
the investment adviser relies on the exemption found in section
275.203A-2(e).
2. Modernize the meaning of ``interactive website'' by:
Adding the word ``operational,'' thus changing the term to
``operational interactive website;''
Adding the term ``digital investment advisory service,''
defined to mean investment advice to clients that is generated by the
website's algorithms as well as the software-based models and
applications covered by the existing rule;
Adding a reference to mobile applications or similar
digital platforms;
Requiring more than one client to which the adviser
provides digital investment advisory services on an ongoing basis; and
Adding an exception to the operational interactive website
requirement for ``temporary technological outages of a de minimis
duration.''
3. Eliminate the de minimis exception allowing fewer than 15 non-
internet clients;
4. Require advisers to make a representation of eligibility on
Schedule D of Form ADV (in addition to checking the appropriate box in
Item 2.A.(11) of Form ADV).
These changes are intended to modernize the Internet Adviser
Exemption, retain its intended narrow scope, and minimize opportunities
for advisers to misuse the exemption to register with the Commission
without meeting its conditions. Most commenters generally expressed
broad support for the proposed rule amendments. For example, one
commenter mentioned that the amendments would reflect a better
allocation of regulatory responsibility between State regulators and
the Commission by allowing the Commission to focus on regulating
internet investment advisers that have a national presence. The
commenter noted further that these amendments would help accomplish the
original purpose of the exemption.\112\
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\112\ See Better Markets Comment Letter.
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Amending the definition of ``interactive website'' to include the
new defined term ``digital investment advisory service'' captures the
increasing variety of technological methods by which internet
investment advisers provide advice using the internet. Also, the
addition of the terms ``mobile application, or similar digital
platform'' and ``algorithms'' will better align with technological
advances in the industry. Advisers increasingly make use of various
mobile applications to interact with the clients and use algorithms to
generate investment advice.\113\ The improved definition thus allows
internet investment advisers that rely on mobile applications, or
similar digital platforms, to generate advice to use the Internet
Adviser Exemption, potentially reducing their burdens associated with
multiple States' registrations and regulations. Further, internet
investment adviser clients will benefit from being able to rely on
mobile applications, or similar digital platforms, and algorithms,
which offer a convenient means of interaction between the adviser and
its clients. Additionally, including an exception for temporary
technological outages of a de minimis duration should help accommodate
occasional technological issues with the digital platform so the
internet investment adviser is not required to frequently withdraw and
re-register due to minor or temporary technical difficulties or planned
maintenance.
---------------------------------------------------------------------------
\113\ See supra section II.B.
---------------------------------------------------------------------------
To the extent advisers may be registering with the Commission in
order to market themselves to potential clients, the amended rule
should help avoid misleading clients. For instance, advisers without an
``operational'' website will be excluded from the pool of advisers
eligible for the Internet Adviser Exemption. This will avoid clients
contracting with an adviser that is relying on the Internet Adviser
Exemption for registration whose website cannot be used to provide
investment advice. To the extent any investors may be led to believe
that an adviser relying on the Internet Adviser Exemption for
registration has national presence and conducts its business via the
internet, when this is not in fact the case, the amended rule could
help avoid the possibility of investors using a type of adviser they
did not intend to use.
The amendments remove the de minimis exception for non-internet
clients, preventing advisers with any non-internet clients from relying
on the Internet Adviser Exemption. Removing the exception better serves
the narrow-intended scope of the Internet Adviser Exemption.\114\ As
explained in section
[[Page 24705]]
II.C., this amendment will assist Commission staff in identifying
advisers claiming reliance on the exemption without meeting the
requisite conditions. Additionally, the de minimis exception is no
longer needed in light of the widespread use of the internet, the
relative ease of building and maintaining a website and applications,
and other technological advances that better allow advisers to monitor
to whom their advice is being provided. Accordingly, the elimination of
the de minimis exception better reflects the allocation of regulatory
responsibility between the Commission and the States.
---------------------------------------------------------------------------
\114\ See supra section II.C.
---------------------------------------------------------------------------
Additionally, the amended rule requiring advisers to represent
their Internet Adviser Exemption eligibility on Schedule D of Form ADV
should reduce the number of erroneous registrations and subsequent
withdrawals. Instead of only checking a box on Form ADV indicating they
``are an internet adviser relying on rule 203A-2e,'' advisers will see
a separate text description, on Form ADV, of the actions the adviser
must have taken to become or remain eligible for the Internet Adviser
Exemption.\115\ The separate text description will clearly state for
registrants the requirements that they must meet in order to qualify,
and which they are certifying that they have met when they file Form
ADV.\116\ We also anticipate that by avoiding erroneous registration,
ineligible registrants will avoid expending time and effort on dealing
with withdrawals, and corresponding legal fees.
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\115\ Schedule D of Part 1A of Form ADV currently is submitted
in a structured (i.e., machine-readable), XML-based data language
specific to that Form, so the additional information that would be
required on Schedule D under the proposed rule amendments would also
be structured.
\116\ This amendment would also assist Commission staff in
connection with its review of existing registrations and
registration applications for compliance with the rule and, as
applicable, for possible deregistration for inability to meet the
conditions of the rule.
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The amendments to Form ADV will help ensure that registrants are
aware of the new ``operational interactive website'' requirement and
avoid erroneous registration.\117\ In addition, the amendments will
require internet investment advisers, as an initial matter and
periodically thereafter, to provide an additional affirmative
representation on Form ADV that more clearly notes the requirements of
the exemption. As discussed in section II.D, the existing form, has not
reduced the incidence of advisers erroneously relying on the exemption.
The amendments to Form ADV will also aid Commission staff in
administering the adviser registration process.\118\
---------------------------------------------------------------------------
\117\ See supra section II.D.
\118\ See supra section II.D.
---------------------------------------------------------------------------
Prior to the amendments, the Internet Adviser Exemption did not
require an adviser to have a minimum number of clients.\119\ Requiring
that digital investment advisory services be provided on an ongoing
basis to more than one client will better align with the original goal
of the exemption, which was to provide relief from multiple State
registration requirements for advisers with a national presence via the
internet.\120\
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\119\ The rule required an adviser relying on the exemption to
provide investment advice to all of its clients exclusively through
an interactive website, except that the investment adviser may
provide investment advice to fewer than 15 clients through other
means during the preceding 12 months.
\120\ See supra section II.
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2. Costs
The amended rule may adversely affect some advisers. The adopted
amendments would specifically require that the website be
``operational,'' and advisers may incur a cost of updating their
website to become operational or withdrawing their Commission
registration if their website is not operational. One commenter
expressed concern that such a requirement may adversely affect small
advisers with only a few clients.\121\ Advisers relying on the Internet
Adviser Exemption, large or small, however, should already have an
interactive website and the Commission does not currently recognize a
grace period to develop a website, beyond the separate, rule 203A-2(c)
exemption for an investment adviser expecting to be eligible for
Commission registration within 120 days, so the amended rule is not
expected to require new website development costs for advisers of any
size.\122\ Therefore, this amendment would not produce significant
incremental costs for small investment advisers.\123\
---------------------------------------------------------------------------
\121\ See Robert Martin Comment Letter.
\122\ See supra note 48 and accompanying text.
\123\ See also infra section VI.
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Advisers that choose to withdraw their Commission registration must
file Form ADV-W. The current burden estimate to file Form ADV-W is 0.75
hour per respondent,\124\ implying a cost of withdrawal of $319 per
adviser.\125\ The costs to file this form may vary between advisers and
may be larger than this estimate for some. In addition, depending on
their location and the scope and nature of their activities (if any),
advisers that withdraw from Commission registration might need to
register with one or more States. While these advisers would no longer
be required to bear the costs associated with compliance with
Commission rules, they would bear the cost associated with preparing
State registration filings, paying State registration fees,\126\ and
complying with the registration requirements of the States with which
they register. Also, to the extent some clients value Commission
registration and select advisers based on their Commission registration
status, advisers could lose clients as a result of withdrawal; however,
we do not have information that would allow us to predict the size or
magnitude of this effect.\127\ The Commission received no comments or
estimates pertaining to these costs.
---------------------------------------------------------------------------
\124\ See, e.g., Submission for OMB Review; Comment request;
Extension: Rule 203-2 and Form ADV-W, 88 FR 37913 (June 9, 2023)
(describing the burden associated with the previously approved
collection of information under OMB Control No. 3235-0313).
\125\ 0.75 hour * $425 = $319. The maximum total cost of
withdrawals assuming all 261 currently registered internet
investment advisers relying exclusively on the Internet Adviser
Exemption have to withdraw is 0.75 hour * $425 * 261 = $83,194.
Assuming only 107 currently registered internet investment advisers
with zero clients and 5 advisers with one client will have to
withdraw, the total estimated cost is 0.75 hour * $425 *112 =
$35,700. The $425 compensation rate used is the rate for a Sr.
Operations Manager in the SIFMA Report on Management & Professional
Earnings in the Securities Industry--2013 (Oct. 7, 2013), adjusted
for inflation using the Bureau of Labor Statistics' Consumer Price
Index inflation calculator, modified to account for a 1,800-hour
work-year, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead.
\126\ State registration fees are typically the same as State
notice filing fees, so to the extent the adviser is already paying
notice filing fees in the states where it would need to register,
the difference in filing fees should be de minimis. See supra note
98.
\127\ See Proposing Release at note 65 and surrounding text
(discussion of dual basis registration).
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Internet investment advisers that rely exclusively on the Internet
Adviser Exemption and have non-internet clients, as is currently
allowed, would be affected by the rule amendments because they could no
longer rely on the exemption as a basis for registering with the
Commission. Advisers that offer human-directed advice provided by
electronic means would not be eligible for the exemption. These
advisers may be required to register with one or more States if their
total number of clients in any given State exceeds five and the State
requires registration.\128\
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\128\ See section 222(d) of the Advisers Act. We are unable to
quantify the costs of registering with the States, beyond State
registration fees, because the registration requirements and forms,
and the corresponding time spent by firms, vary by each State and
there is no available data to make such estimates. The average of
State registration fees is $224. See supra note 98.
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One commenter expressed a concern that disallowing human generated
[[Page 24706]]
advice could adversely affect adviser-client interactions due to a loss
of valuable client feedback on, for example, new services or
software.\129\ The Internet Adviser Exemption was adopted for advisers
that provide investment advice to their internet clients
``exclusively'' through their interactive website.\130\ The current de
minimis exception was adopted when providing advice through the
internet was still in a fairly nascent stage and the exception could
prevent internet investment advisers from losing their ability to rely
on the exemption while providing advice to a small number of clients
other than using the internet.\131\ As discussed in section II.C., the
Internet Adviser Exemption was not designed to permit human interaction
more broadly.\132\ However, the rule amendment does not prohibit human
interactions with clients unrelated to the provision of investment
advice, such as human interactions to resolve technical issues or
collect feedback related to with new services, software, computer
models, or help clients navigate the website or application. The
elimination of the de minimis exception is to respond to the widespread
use of internet, relative ease of building and maintaining a website
and applications and other technological advances. Thus, it will better
reflect the allocation of regulatory responsibility between the
Commission and the States.\133\ It will also help the Commission better
identify advisers claiming reliance on the exemption without meeting
the requirement that investment advice is provided to all clients
exclusively through an operational interactive website.
---------------------------------------------------------------------------
\129\ See Anonymous Comment Letter.
\130\ See 2002 Adopting Release at section II.A.1. See also
supra note 16 and accompanying text.
\131\ See supra note 66 and accompanying text.
\132\ See supra notes 66-67.
\133\ See supra section I.B. (discussing the allocation of
regulatory responsibility under NSMIA).
---------------------------------------------------------------------------
The amended rule is designed to focus on advisers that provide
advice exclusively through the internet. Advisers currently relying on
the Internet Adviser Exemption may need to change the way they
communicate with or deliver services to their clients or rely on a
different basis for Commission registration, if available. For example,
internet investment advisers that have been providing advice via means
other than an interactive website or with some human input might have
to change their communication with clients in order to continue to rely
on the exemption. In some cases, such advisers may either have to
withdraw their registration or lose clients that request and/or require
human-directed client-specific investment advice. Depending on the
clients' needs, they may have to switch to a different adviser. As
discussed in section IV.B, internet investment advisers typically
advise non-high net worth individual clients. In addition to the cost
associated with finding a new adviser, switching to a different adviser
may represent a cost increase for such clients if the new adviser has
higher fees. If in some cases the new adviser has lower fees, the
clients may still face some switching costs, which could be higher than
the savings from the lower fees.
The additional representation of eligibility on Schedule D of Form
ADV may increase the time and effort advisers expend when filing Form
ADV. One commenter, for example, expressed concern that Form ADV may
become too lengthy as a result.\134\ Nevertheless, such costs are
expected to be minimal.\135\ In addition, some of the costs associated
with advisers having to register with multiple States are alleviated by
the fact that the State registration burdens assessed when the
exemption was originally implemented have declined since 2002, as now
the advisers may be able to rely on other available exemptions or more
easily meet registration thresholds in order to register with the
Commission. For example, as discussed in the baseline, the multi-state
exemption threshold was decreased from 30 to 15, making it easier for
advisers to qualify for this exemption. Further, as discussed in the
baseline, advisers relying on the Internet Adviser Exemption now tend
to have more registered assets under management on average per adviser
and some may be able to reach the minimum threshold on the registered
assets under management sooner in order to qualify for the Commission
registration. Specifically, the average regulatory assets under
management per adviser for internet investment advisers (about $56.09
million) was 144 times larger than it was in December 2003 when
advisers using the exemption had on average about $0.39 million of
registered assets under management per adviser.
---------------------------------------------------------------------------
\134\ See Robert Martin Comment Letter. See also supra note 74
and accompanying text for a discussion of this commenter's concern.
\135\ See supra section IV.C.
---------------------------------------------------------------------------
The adopted change would render ineligible for the exemption all
the currently registered internet investment advisers with one or zero
clients. This would reduce the current population of exemption-eligible
advisers by approximately 40%, unless those advisers obtained
additional clients.\136\ While reducing the number of advisers relying
on the exemption is not a goal of the rule, a reduction would reflect
the narrow scope of the Commission's exemptive rule.\137\
---------------------------------------------------------------------------
\136\ See previous discussion in baseline on the number of
internet investment advisers with zero (107) and one (5) client out
of 271 total internet investment advisers.
\137\ 2002 Adopting Release at 77621; 15 U.S.C. 80b-3a(c)
(allowing exemptions from the limits on Commission registration when
those limits ``would be unfair, a burden on interstate commerce, or
otherwise inconsistent with the purposes of this section'').
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3. Effects on Efficiency, Competition, and Capital Formation
We do not anticipate any significant effects on efficiency,
competition, and capital formation, as the amended rule represents a
minor change of the exemption parameters and is not intended to
conceptually change the exemption or the original intended division of
the regulatory authority over investment advisers between the
Commission and the States. As discussed in the baseline, the number of
advisers potentially affected by the amendments is small and does not
represent a significant portion of the population of investment
advisers or their clients.
The amendments may have a positive effect on competition and
capital formation as they are designed to modernize the rule to
recognize advances in technology and digital services employed by the
investment advisory industry. Specifying that internet investment
advisers may use technology, such as mobile applications, or a similar
digital platform, that can better fit their clients' needs should
improve client-adviser interactions, and the quality of the services
provided, and could encourage client participation. Increased client
participation, in turn, may also encourage new entrants in the internet
adviser space. The potential increase in client participation, and any
associated increase in new entrants that provide internet adviser
services, could lead to more investment in the capital markets,
although this effect may not be significant given the small number and
market share of internet advisers.
Conversely, there could be opposing, negative effects on
competition and capital formation, because certain rule amendments,
such as the removal of the current de minimis exception, could
adversely affect adviser-client interactions by preventing internet
investment advisers from relying on the Internet Adviser Exemption when
providing, to any client, advice beyond digital investment advisory
services. In
[[Page 24707]]
some cases, advisers may need to choose between retaining their
Commission registration (if they rely solely on the Internet Adviser
Exemption) or continuing to provide human-directed advice as is allowed
under the current wording of the exemption. This may lead to advisers
losing some clients who value both Commission registration and human-
directed advice and thus affect competition in the investment adviser
market.
D. Reasonable Alternatives
1. Allowing Non-Internet Clients
As an alternative to removing the de minimis provision that allowed
internet investment advisers to have 15 or fewer non-internet clients,
the Commission considered reducing that number, for example, by setting
a defined maximum of non-internet clients, such as five. Reducing the
maximum to five could strengthen the link between the Internet Adviser
Exemption and the internet advisory business, while retaining an
adviser's flexibility to accommodate a small number of customers who
seek advice beyond mere website output allowed under the final
amendment to the exemption.
However, as discussed in section II.C, if an internet investment
adviser is advising non-internet clients, it should not be exempted
from the registration rules that otherwise apply to all investment
advisers and should more properly be regulated by a State (or States)
or the Commission (using a different basis for registration), as
applicable. This alternative may require advisers to keep additional
records tracing instances in which clients received advice beyond the
model generated output. Such cases may be hard to identify because, as
discussed earlier in the Economic Analysis, it may not always be clear
when some human input was involved and to what extent. This alternative
may thus result in a greater number of erroneous registrations and
subsequent withdrawals as compared to the current rule.
The Commission also considered variations, such as defining a
maximum number of non-internet clients as a percentage of the adviser's
total number of clients. Under this variation, however, the maximum
number of non-internet clients could be quite large for advisers with
many clients, implying sufficient local presence to register with one
or more States, while remaining quite small for investors with few
clients and still limiting their interactions with clients. This may
not be fair, efficient or reflect the originally intended allocation of
adviser regulation responsibilities between the Commission and the
States: for example, advisers with a large number of non-internet
clients in a given State are more likely to have a local presence in
the State as opposed to a national presence.
2. Alternative Definitions of ``Interactive Website''
The Commission also considered adding a different minimum number of
clients to the definition of ``operational interactive website.'' One
commenter suggested 15 clients.\138\ This commenter expressed that, in
its view, 15 or more clients, rather than the proposed ``more than
one,'' is a better indicator of an adviser's national presence.\139\
Although there could be various ways of demonstrating national
presence, in the context of the Internet Adviser Exemption, the
existence of an operational interactive website that can be accessed by
clients located in multiple States demonstrates a national presence,
whereas the requirement to have a certain minimum number of clients is
designed to ensure that the adviser meets the definition of investment
adviser and has a basis for registration.
---------------------------------------------------------------------------
\138\ Better Markets Comment Letter.
\139\ Id.
---------------------------------------------------------------------------
A larger number of clients would indeed help limit Commission
registration to those advisers with a national presence. Requiring a
larger minimum number of clients to qualify for the exemption would
exclude advisers that are not otherwise eligible for Commission
registration, but that obtain one or a few clients with the sole
purpose of relying on the exemption. This would work against the
originally intended division of regulatory authority between the
Commission and the States. A larger minimum number of clients may,
however, put advisers with a small clientele or advisers which are at
the early stages of starting their advisory business at a disadvantage.
Further, the definition of ``interactive website'' could use a term
other than ``operational,'' such as ``functioning'' or ``working,'' to
highlight the requirement that the website can be used by the clients
or prospective clients to interact with adviser or obtain advising
services. These alternative terms could simplify the rule text.
However, such terms may be less technical and more prone to potentially
inconsistent interpretations across advisers. As discussed in the
Benefits section, adding the term ``operational'' helps prevent
advisers from relying on the Internet Adviser Exemption if their
website cannot be used to provide investment advice.
Further, the definition of ``interactive website'' could use a more
specific definition of the types of client interactions allowed, as
suggested by one commenter.\140\ For example, the definition of the
term could specify that while expanding on model-generated advice is
not allowed, other human interactions are permissible. This alternative
would help avoid situations when rule text risks giving advisers the
impression that they cannot communicate directly with their clients
without violating the Exemption's requirements. Such a misunderstanding
could lead advisers to not respond to their clients.\141\ However,
adding such language may result in non-internet advisers attempting to
rely on the Internet Adviser Exemption by manipulating these
definitions, for instance, by attempting to redefine certain human
interactions as those permissible by the rule.
---------------------------------------------------------------------------
\140\ See NASAA Comment Letter.
\141\ See id.
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One commenter suggested further clarifying which clients are served
on an ``ongoing basis.'' \142\ We considered adding a test or
definition to classify clients who receive investment advice on an
ongoing basis, but concluded that the meaning of ``ongoing basis'' as
proposed and as adopted is sufficiently understood under an existing,
broadly applicable framework. That is, as discussed in section II.A, an
internet investment adviser generally is providing investment advice on
an ongoing basis through its website to a client if the advice is
within the scope of the adviser-client relationship.
---------------------------------------------------------------------------
\142\ See Maksym Puzin Comment Letter.
---------------------------------------------------------------------------
3. Eliminating the Internet Adviser Exemption
As another alternative, the Commission considered eliminating the
Internet Adviser Exemption. With the proliferation of internet tools
and their frequent use by all types of advisers, the distinction might
no longer be valuable. In addition, specifically defining the bounds of
the exemption may remain difficult, as evolving industry practices
could quickly make rule definitions stale. New innovations and new ways
of communication with the clients, which are not accounted for by the
exemption definitions, could render the exemption unavailable to some
internet investment advisers who adopt those new technologies. Further,
as discussed in the section on costs, erroneous registrations
associated with the rule
[[Page 24708]]
can create additional costs for advisers due to registration
withdrawals. Eliminating the exemption would eliminate these issues.
However, eliminating the exemption would result in certain costs.
Advisers that currently rely on the exemption would no longer be able
to use it, and therefore would not be eligible to register with the
Commission unless they meet the criteria of another exemption. Losing
Commission registration would impose costs: for example, the adviser
may lose some clients or may need to comply with State regulation
requirements, as discussed in the Costs section. Further, losing a
basis for Commission registration would require the adviser to file
Form ADV-W. We estimate the burden to file Form ADV-W to withdraw from
registration as 0.75 hour per respondent,\143\ which can be expressed
as a per-registrant cost of $319.\144\ Assuming 261 currently
registered internet investment advisers relying exclusively on the
Internet Adviser Exemption would have to withdraw from registration,
the total cost of filing Form ADV-W is estimated as $83,194.\145\
---------------------------------------------------------------------------
\143\ See supra note 124 and accompanying text.
\144\ $425*0.75 hour per respondent. The $425 compensation rate
is calculated as described in supra note 125.
\145\ $425 * 0.75 hour per respondent * 261 advisers. The $425
compensation rate is calculated as described in supra note 125.
---------------------------------------------------------------------------
This alternative could also result in advisers losing some clients
to the extent clients value Commission registration. Such clients would
have to seek a different adviser and potentially face higher fees as
well as switching costs as discussed above.\146\ Further, losing
Commission registration may result in advisers having to register in
multiple (up to 14) States and be subject to the appropriate State
regulations until they become eligible under a different rule or
exemption, which would create a burden, especially for small
advisers.\147\ Nevertheless, in aggregate, such costs would likely be
small as the advisers exclusively using the Internet Adviser Exemption
comprise a very small portion of the relevant market (as discussed
previously, 1.7% of the total number of advisers and 0.003% of the
total assets under management).
---------------------------------------------------------------------------
\146\ As discussed previously in the costs section, we are
unable to quantify these costs due to a lack of data on such clients
and the new advisers they may have selected. Commenters did not
provide information on this topic.
\147\ See relevant discussion in section IV.C.2. As stated
previously in the costs discussion, we are unable to quantify the
costs of registering with the states, beyond State registration fees
($224 on average across states), because the registration
requirements and forms, and the corresponding time spent by firms,
vary by each State and there is no available data to make such
estimates.
---------------------------------------------------------------------------
V. Paperwork Reduction Act
A. Introduction
The amendments will result in new ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\148\ The amendments will have an impact on the current
collection of information burdens of rule 203A-2(e) and Form ADV under
the Act. The titles for the collections of information are: (i)
``Exemption for Certain Investment Advisers Operating Through the
Internet (Rule 203A-2(e))'' (OMB control number 3235-0559); and (ii)
``Form ADV'' (OMB control number 3235-0049). The Commission is
submitting the final collections of information to the OMB for review
and approval in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid OMB control number. The Commission published notice soliciting
comments on the collection of information requirements in the Proposing
Release and submitted the proposed collections of information to OMB
for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The
Commission did not receive any comments that addressed the estimated
PRA burdens and costs in the Proposing Release.
---------------------------------------------------------------------------
\148\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
B. Rule 203A-2(e) Recordkeeping Requirement
The amended rule will require an internet investment adviser to
provide investment advice to all of its clients exclusively through an
operational interactive website,\149\ and will require advisers
registering with the Commission 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.\150\ Although most advisers registering under the rule
usually generate the necessary records in the ordinary conduct of their
internet advisory business, the recordkeeping requirement of rule 203A-
2(e) nonetheless may impose a small additional burden on these
advisers. We estimate this recordkeeping burden to amount to an average
of four (4) hours annually per adviser.\151\
---------------------------------------------------------------------------
\149\ See amended rule 203A-2(e)(1)(i).
\150\ See amended rule 203A-2(e)(1)(ii). Under the amended rule,
advisers will need to maintain records of their compliance with the
rule. The elimination of the de minimis exception does not result in
an increase in the burden under the amended rule but it has been
accounted for in our estimated burden for the amended rule.
\151\ The adviser will need to demonstrate that all of its
clients obtain investment advice from the firm exclusively through
an operational interactive website. Internet investment advisers
that conduct their business exclusively through interactive websites
and whose employees never directly communicate with clients will
likely need to spend very little time documenting their compliance
with the condition. An adviser that has personnel that assist
clients directly (whether through email, chatbots, telephonically,
or otherwise) with administrative functions like accessing the
website may need to spend more time.
---------------------------------------------------------------------------
We estimate the number of respondents to this information
collection to be 271 advisers.\152\ Accordingly, we estimate the total
recordkeeping burden hours for all rule 203A-2(e) advisers to be 1,084
hours.\153\ We estimate that the total monetized cost to each internet
adviser to comply with the recordkeeping provision of rule 203A-2(e)
will be approximately $1,700,\154\ and that the total monetized cost
for the 271 advisers relying on this exemption at this time will be
$460,700.\155\
---------------------------------------------------------------------------
\152\ This estimate is based on information reported by advisers
through IARD. Based on IARD data as of June 30, 2023, of the
approximately 15,391 SEC-registered advisers, 271 checked Item
2.A(11) of Part 1A of Form ADV to indicate their basis for SEC
registration under the Internet Adviser Exemption. This estimate may
be overinclusive to the extent that advisers currently registered in
reliance on the exemption, including, but not limited to, those that
currently have one or fewer clients, are not able to satisfy the
requirements of the amended rule. The estimate may be underinclusive
to the extent that additional advisers seek to rely on the Internet
Adviser Exemption, whether due to the industry's increased reliance
on technology or otherwise.
\153\ Four (4) hours x 271 advisers = 1,084 hours.
\154\ We estimate the cost at a rate of $425 per hour. The
compensation rate for the current approved information collection
used is the rate for a Sr. Operations Manager in the Securities
Industry and Financial Markets Association's Report on Management &
Professional Earnings in the Securities Industry 2013 updated for
2023, and is modified to account for an 1,800-hour work-year and
inflation and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead. 4 hours x $425 per hour = $1,700.
\155\ 1,084 hours x $425 per hour = $460,700. We do not expect
advisers to incur any external cost burden in connection with this
information collection because advisers registering under the rule
will generate the necessary records in the ordinary course of their
advisory businesses.
---------------------------------------------------------------------------
C. Form ADV
We are amending Form ADV Part 1A to require advisers to indicate on
Schedule D that, if applying for registration with the Commission, the
adviser will provide--and if amending its existing registration and
continuing to rely on the Internet Adviser Exemption, that it has
provided--investment advice on an ongoing basis to more than one client
exclusively
[[Page 24709]]
through an operational interactive website.\156\ These changes are
designed to provide information to the Commission in connection with
the registration and annual amendments to Form ADV filed by internet
investment advisers and will assist Commission staff in connection with
its review of existing registrations and registration applications for
compliance with the rule and, as applicable, for possible
deregistration of an adviser for an inability to meet the conditions of
the rule.
---------------------------------------------------------------------------
\156\ See supra section II.D.
---------------------------------------------------------------------------
Based on Form ADV data as of June 30, 2023, the Commission
estimates that approximately 261 of the 271 SEC-registered internet
investment advisers (approximately 96%) will complete the final rule's
Form ADV representation by submitting their annual updating amendment
on or prior to the rule's compliance date.\157\ For these advisers, the
ministerial amendments to Form ADV requiring advisers to check a box do
not make any substantive modifications to any existing collection of
information requirements or impose any new substantive recordkeeping or
information collection requirements within the meaning of the PRA.
---------------------------------------------------------------------------
\157\ See supra section II.E.
---------------------------------------------------------------------------
In addition, based on Form ADV data as of June 30, 2023, the
Commission estimates that approximately 10 of the 271 SEC-registered
internet investment advisers (approximately 4%) will not file an annual
updating amendment between September 30, 2024,\158\ and the compliance
date, and will file an other than annual amendment in order to comply
with the rule by the rule's compliance date.\159\ We estimate that the
total burden hours attributable to such internet investment advisers
completion of the other than annual amendment will be 10 hours.\160\ We
estimate that the total monetized cost to each such adviser will be
approximately $360,\161\ and that the total monetized cost for the 10
advisers relying on this exemption at this time will be $3,600.\162\
---------------------------------------------------------------------------
\158\ See supra note 76 (stating that we expect the IARD system
to be able to accept Form ADV filings reflecting the Form ADV
representation by Sept. 30, 2024).
\159\ See supra section II.E.
\160\ One (1) hour x 10 advisers = 10 hours.
\161\ We estimate the cost at a rate of $360 per hour. The
compensation rate for the current approved information collection
used is the rate for a compliance manager in the Securities Industry
and Financial Markets Association's Report on Management &
Professional Earnings in the Securities Industry 2013 updated for
2023, and is modified to account for an 1,800-hour work-year and
inflation and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead. 1 hours x $360 per hour = $360.
\162\ 10 hours x $360 per hour = $3,600.
---------------------------------------------------------------------------
D. Total Hour Burden Associated With Amendments to Rule 203A-2(e) and
Form ADV
We estimate investment advisers that will be subject to the amended
rule will incur a total annual hour burden resulting from the
collections of information discussed above of approximately 1,094
hours, at a monetized cost of $464,300 or $1,713 per adviser.\163\ The
total external burden costs will be $0. The table below summarizes our
PRA annual burden estimates associated with the amendments to rule
203A-2(e) and Form ADV.
---------------------------------------------------------------------------
\163\ This estimate is based upon the following calculation:
(1,084 hours x $425) + (10 hours x $360) = $464,300. $464,300 / 271
advisers = $1,713.
----------------------------------------------------------------------------------------------------------------
Number of External
Rule 203A-2(e) description of new requirements responses Internal burden hours burden costs
----------------------------------------------------------------------------------------------------------------
Final Estimates for Internet Investment Advisers under Rule 203A-2(e) and Form ADV
----------------------------------------------------------------------------------------------------------------
Annual burden for making records sufficient to 271 1,084 (4 hours per adviser)..... 0
demonstrate compliance with rule..
Annual burden for making representations on 10 10 (1 hour per adviser)......... 0
Form ADV, Part 1A, Schedule D..
----------------------------------------------------------------------------------------------------------------
We estimate the total burden under amended rule 203A-2(e) to amount
to an average of four (4) hours annually per internet investment
adviser. This estimate is identical to the estimate of the per-adviser
burden under current 203A-2(e). The differences in total burden hours
and internal monetized costs between current 203A-2(e) and amended
203A-2(e) will be determined primarily by the number of advisers
subject to the rule.
VI. Final Regulatory Flexibility Analysis
The Commission has prepared the following Final Regulatory
Flexibility Analysis (``FRFA'') in accordance with section 604 of the
Regulatory Flexibility Act (``RFA'').\164\ It relates to amended rule
203A-2(e) and Form ADV. An Initial Regulatory Flexibility Analysis
(``IRFA'') was prepared in accordance with the RFA and is included in
the Proposing Release.\165\
---------------------------------------------------------------------------
\164\ 5 U.S.C. 604.
\165\ See Proposing Release at section V.
---------------------------------------------------------------------------
A. Need for and Objectives of the Rule and Form Amendments
1. Amendments to Rule 203A-2(e)
We are amending the Internet Adviser Exemption, which we initially
adopted in 2002. The current Internet Adviser Exemption generally
requires an adviser to:
Provide investment advice to all of its clients
exclusively through an interactive website, except that the investment
adviser may provide investment advice to fewer than 15 clients through
other means during the preceding 12 months; and
Maintain records for a period of not less than five years
demonstrating compliance with the conditions of the rule.
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).\166\ In addition, the amended rule
will remove the current rule's de minimis exception,\167\ which
[[Page 24710]]
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. 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.
---------------------------------------------------------------------------
\166\ See amended rule 203A-2(e)(2). For purposes of the rule,
``digital investment advisory service'' will be defined as
investment advice to clients that is generated by the operational
interactive website's software-based models, algorithms, or
applications based on personal information each client supplies
through the operational interactive website. See id.
\167\ See amended rule 203A-2(e)(1)(i).
---------------------------------------------------------------------------
The amendments to the Internet Adviser Exemption are designed to
reflect the evolution in technology and advisory industry since the
adoption of the rule. In addition, the amendments are designed to
better reflect the allocation of authority between the Federal
Government and States that Congress intended under NSMIA and the Dodd-
Frank Act and enhance investor protection through more efficient use of
the Commission's limited oversight and examination resources by more
appropriately allocating Commission resources to advisers with national
presence and allowing smaller advisers with a sufficiently local
presence to be regulated by the States. The reasons for, and objectives
of, the amendments are discussed in more detail in sections I and II,
above. The burdens of these requirements on small advisers are
discussed below as well as above in sections IV and V, which discuss
the burdens on all advisers. The professional skills required to meet
these specific burdens are also discussed in section V.
2. Amendments to Form ADV
The amended rule will also require an adviser to make
representations on its Form ADV, Part 1A, Schedule D, indicating that
it satisfies the requirements of the rule. This representation is
similar to the representation that advisers relying on the multi-state
exemption make on their Form ADV and will assist Commission staff in
connection with its review of registration applications and
deregistration of advisers that are not in compliance with the rule.
The reasons for, and objectives of, the amendments are discussed in
more detail in sections I and II, above. The burdens of these
requirements on small advisers are discussed below as well as above in
sections IV and V, which discuss the burdens on all advisers. The
professional skills required to meet these specific burdens are also
discussed in section V.
B. Significant Issues Raised by Public Comments
In the Proposing Release, we requested comment on every aspect of
the IRFA, including the number of small entities that would be subject
to the proposed amendments to rule 203A-2(e) and related amendments to
Form ADV, the potential impacts discussed in the analysis of the IRFA,
and whether the proposed amendments could have an effect on small
entities that the Commission has not considered. Although we did not
receive comments specifically addressing the IRFA, one commenter stated
that the ``operational interactive website'' requirement will make it
harder for ``smaller entities to conduct business solely based on the
amount of clients they may have.'' \168\ We carefully considered the
potential impact the amended rule would have on smaller advisers. We
recognize that a larger minimum number of clients may require advisers
with a small clientele or advisers that are at the early stages of
starting their advisory business to register with one or more States,
rather than the Commission, which may subject them to different
regulations.\169\ The requirement that an adviser have a minimum of two
clients is intended to ``reflect that advisers with zero or one client
are more akin to local businesses that can be effectively regulated by
a State, consistent with Congress' intent in NSMIA's amendments to the
Advisers Act.'' \170\ After considering comments, we are adopting the
amendments, as proposed.\171\
---------------------------------------------------------------------------
\168\ See Robert Martin Comment Letter. See also supra section
II.A
\169\ See supra section IV.D.2.
\170\ See Proposing Release at section II.A.1.
\171\ See supra section II.
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C. Legal Basis
The Commission is amending rule 203A-2(e) and Form ADV under the
authority set forth in sections 203A(c) and 211(a) of the Investment
Advisers Act of 1940 [15 U.S.C. 80b-3a(c) and 80b-11(a)].
D. Small Entities Subject to the Rule and Rule Amendments
Under Commission rules, for the purposes of the Advisers Act and
the RFA, an investment adviser generally is a small entity if it: (1)
has assets under management having a total value of less than $25
million; (2) did not have total assets of $5 million or more on the
last day of the most recent fiscal year; and (3) does not control, is
not controlled by, and is not under common control with another
investment adviser that has assets under management of $25 million or
more, or any person (other than a natural person) that had total assets
of $5 million or more on the last day of its most recent fiscal year.
Our amendments to rule 203A-2(e) will not affect most investment
advisers that are small entities (``small advisers'') because they are
generally registered with one or more State securities authorities and
not with the Commission. Under section 203A of the Advisers Act, unless
subject to an exemption such as the Internet Adviser Exemption, most
small advisers are prohibited from registering with the Commission and
are regulated by State regulators. Based on IARD data, we estimate that
as of June 30, 2023, approximately 502 SEC-registered advisers are
small entities under the RFA.
1. Small Entities Subject to Amendments to the Internet Adviser Rule
As discussed above in section IV (the Economic Analysis), the
Commission estimates that based on IARD data as of June 30, 2023,
approximately 271 investment advisers will be subject to the amended
rule and the related amendments to Form ADV. Of the approximately 502
SEC-registered advisers that are small entities under the RFA, 197 will
be subject to the amendments to rule 203A-2(e) and the corresponding
amendments to Form ADV.
E. Projected Reporting, Recordkeeping and Other Compliance Requirements
1. Amendments to Rule 203A-2(e)
Amended rule 203A-2(e) will impose certain reporting,
recordkeeping, and compliance requirements on investment advisers
relying on the exemption for registration with the Commission,
including those that are small entities. We estimate that 271 advisers
\172\ will be required to comply with the amended rule's requirement to
maintain records in accordance with amended rule 203A-2(e)(1)(ii).\173\
The requirements and rule amendments, including compliance, reporting,
and recordkeeping requirements, are summarized in this FRFA (section
VI.A., above). All of these requirements are also discussed in detail,
above, in section II, and these requirements and the burdens on
respondents, including those that are small entities, are discussed
above in sections IV and V (the Economic Analysis and Paperwork
Reduction Act Analysis, respectively) and below. The professional
skills required to meet these specific burdens are also discussed in
section V.
---------------------------------------------------------------------------
\172\ Based on IARD data as of June 30, 2023.
\173\ Amended 203A-2(e)(1)(ii) is identical to current 203A-
2(e)(1)(ii) except for a conforming change to reflect the
requirement that the interactive website be ``operational.''
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[[Page 24711]]
As discussed above, approximately 502 small advisers were
registered with us as of June 30, 2023, and we estimate that 197 of
those small advisers registered with us will be subject to the
amendments (39.2% of all registered small advisers). As discussed above
in our Paperwork Reduction Act Analysis in section V above, the
amendments to rule 203A-2(e) under the Advisers Act will create an
annual burden of approximately 4 hours per adviser, or 788 hours in
aggregate for small advisers.\174\ We estimate that the total monetized
cost to each small adviser to comply with the amendments to the
Internet Adviser Exemption will be approximately $1,700.\175\ We expect
the annual monetized aggregate cost to small advisers associated with
our amendments to the Internet Adviser Exemption will be $334,900.\176\
---------------------------------------------------------------------------
\174\ 197 small advisers x 4 hours.
\175\ See supra note 154 and accompanying text.
\176\ We estimate the cost at a rate of $425 per hour. The
compensation rate for the current approved information collection
used is the rate for a Sr. Operations Manager in the Securities
Industry and Financial Markets Association's Report on Management &
Professional Earnings in the Securities Industry 2013 updated for
2023, and is modified to account for an 1,800-hour work-year and
inflation and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead. 788 hours x $425= $334,900.
---------------------------------------------------------------------------
2. Amendments to Form ADV
The amendments to Form ADV will impose certain reporting and
compliance requirements on investment advisers relying on the rule to
register and remain registered with the Commission, including those
that are small entities. 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.\177\
An adviser registered under the rule and continuing to rely on the rule
as a basis for its registration will be required to make a
representation that it has provided investment advice on an ongoing
basis to more than one client exclusively through an operational
interactive website.\178\ The requirements and rule amendments,
including recordkeeping requirements, are summarized above in this FRFA
(section VI.A). All of these requirements are also discussed in detail,
above, in section II, and these requirements and the burdens on
respondents, including those that are small entities, are discussed
above in sections IV and V (the Economic Analysis and Paperwork
Reduction Act Analysis) and below. The professional skills required to
meet these specific burdens are also discussed in section V.
---------------------------------------------------------------------------
\177\ See supra section II.D.
\178\ See id.
---------------------------------------------------------------------------
Our Economic Analysis (section IV above) discusses these costs and
burdens for respondents, which include small advisers. As discussed
above in our Paperwork Reduction Act Analysis in section V above, the
amendments to Form ADV will not increase the annual burden for advisers
and will have no annual monetized cost.
F. Agency Action To Minimize Effect on Small Entities
The RFA directs the Commission to consider alternatives that would
accomplish our stated objectives, while minimizing any significant
adverse effect on small entities. Accordingly, we considered the
following alternatives for small entities in relation to our amendments
to rule 203A-2(e) and the corresponding amendments to Form ADV: (i)
differing compliance or reporting requirements that take into account
the resources available to small entities; (ii) the clarification,
consolidation, or simplification of compliance and reporting
requirements under the amended rule for such small entities; (iii) the
use of performance rather than design standards; and (iv) an exemption
from coverage of the proposals, or any part thereof, for such small
entities.
Regarding the first and fourth alternatives, the Commission
believes that establishing different compliance or reporting
requirements for small advisers, or exempting small advisers from the
amended rule, or any part thereof, would be inappropriate under these
circumstances. Because the protections of the Advisers Act are intended
to apply equally to clients of both large and small firms, it would be
inconsistent with the purposes of the Advisers Act to specify
differences for small entities under the final amendments to rule 203A-
2(e) and Form ADV. As discussed above, the amended rule is intended to
better reflect the allocation of authority between the Federal
Government and States that Congress intended under NSMIA and the Dodd-
Frank Act and will enhance investor protection through more efficient
use of the Commission's limited oversight and examination resources by
more appropriately allocating Commission resources to advisers with a
national presence and allowing smaller advisers with a sufficiently
local presence to be regulated by the States. These benefits should
apply to clients of smaller firms as well as larger firms. In addition,
as discussed above, our staff will use the corresponding information
that advisers will report on the amended Form ADV to help determine
compliance with the rule and to help prepare for examinations of
investment advisers. Establishing different compliance or reporting
requirements for large and small advisers relying on the Internet
Adviser Exemption would negate these benefits and would be inconsistent
with our mandate to provide a system of public disclosure of investment
adviser information. An Internet investment adviser that is a small
entity, however, by the nature of its business, will likely spend fewer
resources in maintaining records and completing Form ADV and amendments
than a larger adviser. Regarding the fourth alternative, specifically,
the Commission has considered exempting small advisers from the amended
rule. Small advisers are one of the primary beneficiaries of this
exemption. Such an exemption would be inconsistent with the intended
purpose of the amended rule, which, in part, is to provide regulatory
relief from multiple State regulatory requirements.
Regarding the second alternative, the amended rule is clear and
further clarification, consolidation, or simplification of the
compliance requirements is not necessary. As discussed above, the
amended rule will require an Internet investment adviser to (i) provide
investment advice to all of its clients exclusively through an
operational interactive website, (ii) maintain records demonstrating
that it provides investment advice to its clients exclusively through
an operational interactive website,\179\ and (iii) 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.\180\ These provisions will better
reflect the allocation of authority between the Federal Government and
States that Congress intended under NSMIA and the Dodd-Frank Act and
will enhance investor protection through more efficient use of the
Commission's limited oversight and examination resources by more
appropriately allocating Commission resources to advisers with a
national presence and allowing smaller advisers with a
[[Page 24712]]
sufficiently local presence to be regulated by the States. Further, our
amendments requiring the representation on Schedule D of Form ADV will
assist the Commission's examination and enforcement capabilities,
including assessing compliance with rules, and therefore, it will
provide important investor protections.
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\179\ See amended rules 203A-2(e)(1)(i) and (ii). As with the
current rule, a person may not rely on the Internet Adviser
Exemption under the amended rule if it controls, is controlled by,
or is under common control with another investment adviser
registered with the Commission solely in reliance on the adviser
registered under the Internet Adviser Exemption. See 17 CFR
275.203A-2(e)(1)(iii); amended 17 CFR 275.203A-2(e)(1)(iii).
\180\ See supra section II.D.
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Regarding the third alternative, we are using design standards
because we determined that removing the de minimis exception and
requiring Internet investment advisers to exclusively advise internet
clients to be a design standard necessary to better reflect Congress's
intent under NSMIA and the Dodd-Frank Act.
Statutory Authority
The Commission is amending rule 203A-2(e) and Form ADV under the
authority set forth in sections 203A(c) and 211(a) of the Investment
Advisers Act of 1940 [15 U.S.C. 80b-3a(c) and 80b-11(a)].
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements; Securities.
Text of Rules and Form Amendments
For the reasons set out in the preamble, the Commission amends
title 17, chapter II of the Code of Federal Regulations as follows:
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
0
1. The authority citation for part 275 continues to read, in part, as
follows:
Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless
otherwise noted.
* * * * *
Section 275.203A-2 is also issued under 15 U.S.C. 80b-3a.
* * * * *
0
2. Amend Sec. 275.203A-2 by revising paragraph (e) to read as follows:
Sec. 275.203A-2 Exemptions from prohibition on Commission
registration.
* * * * *
(e) Internet investment advisers. (1) An investment adviser that:
(i) Provides investment advice to all of its clients exclusively
through an operational interactive website at all times during which
the investment adviser relies on this paragraph (e);
(ii) Maintains, in an easily accessible place, for a period of not
less than five years from the filing of a Form ADV that includes a
representation that the adviser is eligible to register with the
Commission under this paragraph (e), a record demonstrating that it
provides investment advice to its clients exclusively through an
operational interactive website in accordance with the limits in
paragraph (e)(1)(i) of this section; and
(iii) Does not control, is not controlled by, and is not under
common control with, another investment adviser that registers with the
Commission under paragraph (b) of this section solely in reliance on
the adviser registered under this paragraph (e) as its registered
adviser.
(2) For purposes of this paragraph (e), ``operational interactive
website'' means 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). For purposes of this rule, ``digital investment advisory
service'' is investment advice to clients that is generated by the
operational interactive website's software-based models, algorithms, or
applications based on personal information each client supplies through
the operational interactive website.
(3) An investment adviser may rely on the definition of client in
Sec. 275.202(a)(30)-1 in determining whether it is eligible to rely on
this paragraph (e).
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
0
3. The authority citation for part 279 continues to read as follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-
1, et seq., Pub. L. 111-203, 124 Stat. 1376.
0
4. Amend Form ADV (referenced in Sec. 279.1) by:
0
a. In the instructions to the form, Form ADV: Instructions for Part 1A,
by revising 2.i.;
0
b. In the Glossary of Terms by:
0
i. Redesignating paragraphs 13. through 42. as paragraphs 15. through
43.; and paragraphs 43. through 65. as paragraphs 45. through 67.; and
0
ii. Adding new paragraphs 13. and 44.;
0
c. In Part 1A, revising Item 2.A.(11); and
0
d. In Part 1A, Schedule D, by adding Section 2.A.(11).
Note: Form ADV is attached as Appendix A to this document. Form
ADV will not appear in the Code of Federal Regulations.
By the Commission.
Dated: March 27, 2024.
J. Matthew DeLesDernier,
Deputy Secretary.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendix A--Form ADV
Form ADV (Paper Version)
* * * * *
Form ADV: Instructions for Part 1A
* * * * *
2. Item 2: SEC Registration and SEC Report by Exempt Reporting Advisers
* * * * *
i. Item 2.A.(11): Internet Adviser. You may check box 11 only if
you are eligible for the Internet adviser exemption from the
prohibition on SEC registration. See SEC rule 203A-2(e). If you
check box 11, you must complete Section 2.A.(11) of Schedule D. You
are eligible for this exemption if:
You provide investment advice to all of your clients
exclusively through an operational interactive website at all times
during which you rely on rule 203A-2(e). Other forms of online or
internet investment advice do not qualify for this exemption;
You maintain a record demonstrating that you provide
investment advice to your clients exclusively through an operational
interactive website in accordance with these limits.
* * * * *
Glossary of Terms
* * * * *
13. Digital Investment Advisory Service: Investment advice to
clients that is generated by the operational interactive website's
software-based models, algorithms, or applications based on personal
information each client supplies through the operational interactive
website.
* * * * *
44. Operational Interactive Website: 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).
* * * * *
Part 1A
* * * * *
Item 2. * * *
A. * * *
* * * * *
(11) are an internet adviser relying on rule 203A-2(e);
If you check this box, complete Section 2.A.(11) of Schedule D.
* * * * *
Schedule D
* * * * *
Section 2.A.(11) Internet Adviser
If you are relying on rule 203A-2(e), the internet adviser
exemption from the
[[Page 24713]]
prohibition on registration, you are required to make a
representation about your eligibility for SEC registration. By
checking the appropriate box, you will be deemed to have made the
required representation.
If you are applying for registration as an investment adviser
with the SEC or changing your existing Item 2 response regarding
your eligibility for SEC registration, you must make this
representation:
[ballot] I will provide investment advice on an ongoing basis to
more than one client exclusively through an operational interactive
website.
If you are filing an annual updating amendment to your existing
registration and are continuing to rely on the internet adviser
exemption for SEC registration, you must make this representation:
[ballot] I have provided and will continue to provide investment
advice on an ongoing basis to more than one client exclusively
through an operational interactive website.
* * * * *
[FR Doc. 2024-06865 Filed 4-8-24; 8:45 am]
BILLING CODE 8011-01-P