Exemption for Certain Investment Advisers Operating Through the Internet
July 26, 2023
Thank you, Chair Gensler. Reviewing our regulations periodically to evaluate whether they are still fit for purpose as markets evolve and practices change is important. Sometimes we have to tweak or jettison a rule. The internet adviser exemption should stay on the books, but it needs a tune-up, and I thank the staffs in the Divisions of Investment Management and Economic and Risk Analysis for their repair work. So while I have some questions, I support seeking comment on whether our suggested changes have merit.
Briefly stated, the internet adviser exemption is intended to provide a narrow path for otherwise ineligible investment advisers providing advice through the internet to register with the Commission. But, the exemption is not working. As the Commission staff relayed in a 2021 Risk Alert, “[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to rely on the exemption, and many were not otherwise eligible for SEC-registration.”[1] Many internet advisers have withdrawn their registrations, and the rate of withdrawals has been increasing.[2]
In a seemingly sensible effort to bring the exemption more in line with its intended purpose, the proposal would eliminate the ability for internet advisers to have any non-internet clients and require that the adviser’s website or mobile application always be operational and serving at least one client.
As mentioned, I have a few questions:
- The term “digital investment advisory services,” the release explains, “could include advice that is generated by software-based algorithms in addition to software-based models or applications.”[3] This proposed language, in itself, is not problematic, but it may become so in light of today’s earlier proposal. What effect would we anticipate the Conflicts of Interest proposal, which would reach such technologies, having on advisers, particularly small advisers, seeking to use the internet exemption?
- One of the proposed requirements is that an adviser have a constantly operational website. Would the rule allow for temporary planned outages to implement software upgrades?
[1] Proposing Release at 11.
[2] Proposing Release at 13 (“At the same time, the frequency of registration withdrawals and cancellations of internet investment advisers also has increased since the rule’s adoption, which has affected the cumulative growth in the number of advisers relying on the exemption. For example, approximately 64 percent of the advisers withdrawing their registration under the rule have done so since 2017, while only approximately 36 percent of the withdrawing advisers did so from the rule’s adoption in 2002 through 2016.”).
[3] Proposing Release at 20 (“The proposed definition is designed to address that, like the current rule, an adviser must provide investment advice exclusively through an interactive website, but specify that the generation of such advice could include advice that is generated by software-based algorithms in addition to software-based models or applications, in each case, based on personal information each client supplies through the interactive website.”).