Internet-based investment advisory firms rose tenfold over the last several years. With the evolution of information technology, the acceptance of cryptocurrencies, and the shift to a more inclusive investment mindset, this trend is not surprising.
In the early 2000s, investment advisors tapped into the opportunities the internet brought, such as convenience, accessibility, and freedom from geographic restrictions, making it possible for smaller businesses to serve their investors wherever they were located.
There was, however, one obstacle: registration.
Would an adviser have to register in every single state in which they serve clients? In 2002, the U.S. Securities and Exchange Commission (SEC) responded to that issue by establishing the Internet Adviser Exemption Rule.
Per the 2002 Internet Adviser Exemption, RIAs who met the following criteria could qualify for the exemption:
- Firms that provide investment advisory services through a website can be exempt.
- With a de minimus exemption for up to 15 non-internet clients served within 12 months.
On March 27, 2024, the SEC issued an amendment to the internet adviser rule to meet the advancements and saturation of technologies and to outline what it meant to offer investment advisory services online in today’s market. Another reason for amending the exemption was the concerning number of firms that were not meeting their compliance requirements.
According to the 2024 amended internet adviser rule, RIAs can be exempt from multi-state registrations if they meet the following new criteria:
- The online-based service must be available 24/7 except for maintenance or other situations outside of the RIA’s power.
- The RIA must exclusively offer internet-based advisory services.
- That is, the de minimus caveat was removed, and RIAs that have offline clients will not qualify under the amended rule.
- Services must be delivered via the website, app, or other platform, and advisory services cannot be changed, or delivered by personnel.
The amended rule, which clarifies prior criteria and aims to address the needs of today’s tech-run world, is set to go into effect on June 27, 2024.It is vital for internet-based advisers to maintain compliance by including this exemption in their annual Form ADV. Advisers whose fiscal year end is different from December 31 should make note that they are required to include and submit Schedule D of their Form ADV by March 31, 2025.
Jacko Law Group provides corporate, regulatory, and litigation services to investment firms, advisors, broker-dealers, and others. With years of experience in business formation, transitions, compliance, and more, we understand the unique complexities that come with forming and running an internet-based advisory firm. For legal and regulatory questions on the new internet advisers’ rule, please contact us at 619.298.2880 or email info@jackolg.com.