As indicated in the proposing release, beginning with the passage of the National Securities Markets Improvement Act of 1996, and continuing through the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress has meted out responsibilities for oversight of investment advisers between the Securities and Exchange Commission and state securities authorities.[1] This division of labor was made with recognition of the limited resources of both the SEC and the states, and in order to reduce the burdens on investment advisers of potentially overlapping regulatory regimes.[2]

In demarcating the borders of jurisdiction, Congress determined generally that the Commission should regulate those larger advisers with a national presence, and the states should regulate those smaller and mid-sized firms that could be better characterized as local businesses. Congress further recognized, however, that there could be certain exceptions to the rule.[3]

One such exception, recognized by the Commission in 2002, applies to internet advisers. Though these advisers otherwise may not meet the statutory thresholds for registering with the Commission, the agency created a limited exemption for advisers who provide advice to their clients almost exclusively through an interactive website. But for this exemption, internet advisers who do not meet the statutory thresholds for registration with the Commission would likely incur the burdens of temporarily registering in multiple states and then later withdrawing, depending on the current makeup of their client base. As the proposing release points out, in the 20 years from its adoption through the end of 2022, 845 advisers have relied on the Internet Adviser Exemption as the basis for registration with the Commission, and the exemption has been used with increasing frequency in more recent years.[4]

The problem, however, is that the exemption is being chronically misused. In 2021, staff observed that nearly half of the examined advisers relying on the Internet Adviser Exemption in fact did not meet the requirements of exemption.[5] This was, in many instances, because they did not have an interactive website, or they had advisory personnel who could expand on the investment advice provided by their interactive website or provide other advice.[6] Exam staff also observed many other points of non-compliance generally in the internet adviser space.[7]

Thus, an exemption that was intended to be quite narrow has become broad – and broadly-misused – to the benefit of certain non-compliant advisers who may have avoided multiple state registrations and potentially used registration with the Commission to instill the imprimatur of agency approval. Today’s proposal would draw a stronger but narrower line of demarcation around the Internet Adviser Exemption. It would, among other things, require that internet advisers have an “operational” interactive website, and would eliminate the de minimis exception in the current rule, which permits internet advisers to have up to 15 non-internet clients. Today’s proposal accounts for market developments, and the rise of robo-advisers, but nonetheless brings the Internet Adviser Exemption back into alignment with our statutory mandate and its regulatory purpose.

I want to extend my gratitude, as always, to the teams in the Division of Investment Management, the Division of Examinations, the Division of Economic and Risk Analysis, and the General Counsel’s Office, for their work on this release and for their vigilance in helping to ensure that our rules are adhered to and serve their intended purposes. With that, I am happy to support today’s proposal.