The Securities and Exchange Commission (SEC) has decided to update a rule from 2002 by making the requirements for internet-based advisors to register with the SEC more stringent.

In the past, smaller financial advisors were required to register with state securities regulators, whereas larger firms had the option to register with the SEC. However, a provision implemented in 2002 permitted companies that primarily conducted business online to register with the SEC.

The SEC recently observed that firms are abusing the exemption by using it even when they do not meet the eligibility criteria.

As a result, the regulator is currently amending its rules to mandate that companies utilizing the exemption must have an operational, user-friendly website that offers continuous digital investment advisory services. They are required to just offer guidance to clients via the website.

“The website cannot be used as a prop, akin to how a person behind the curtain used props to pretend to be the Wizard of Oz,” noted Gary Gensler, chair of the SEC.

“These changes better reflect what it means in 2024 truly to provide an exclusively internet-based service. This would better align registration requirements with modern technology and help the commission in the efficient and effective oversight of registered investment advisors.”

The amendments also remove the de minimis exception of the regulation, which formerly permitted advisors to have less than 15 non-internet clients in a single year. Advisors who choose to use the exemption must now only offer their services to customers through their website and must update their Form ADV to include a statement confirming their eligibility to register with the Commission.

The new regulations will become effective in 90 days. Companies who depend on the exemption will be required to adhere to the regulation by March 31, 2025.