Document ID: SEC-2023-0808-0001
Agency: sec
Document Type: Proposed Rule
Title: Exemption for Certain Investment Advisers Operating Through the Internet
Posted Date: 2023-08-01T04:00Z

[Federal Register Volume 88, Number 146 (Tuesday, August 1, 2023)]
[Proposed Rules]
[Pages 50076-50096]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-16287]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-6354; File No. S7-13-23]
RIN 3235-AN31

Exemption for Certain Investment Advisers Operating Through the 
Internet

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is proposing 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 proposed 
amendments are designed to modernize the rule's conditions to account 
for the evolution in technology and the investment advisory industry 
since the adoption of the rule.

DATES: Comments should be received on or before October 2, 2023.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/proposed.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-13-23 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-13-23. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method of submission. The Commission will post all 
comments on the Commission's Website (https://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Operating conditions may limit access to the 
Commission's Public Reference Room. Do not include personal 
identifiable information in submissions; you should submit only 
information that you wish to make available publicly. We may redact in 
part or withhold entirely from publication submitted material that is 
obscene or subject to copyright protection.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Blair B. Burnett, Senior Counsel, 
Investment Company Rulemaking Office; Michael Schrader, Senior Counsel, 
Chief Counsel's Office; or Sirimal R. Mukerjee, Senior Special Counsel, 
or Melissa Roverts Harke, Assistant Director, Investment Adviser 
Rulemaking 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 proposing for public 
comment amendments to 17 CFR 275.203A-2(e) (``rule 203A-2(e)'') 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 part 275], in which these rules are published.
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Table of Contents

I. Background
    A. Current Rule 203A-2(e)
    B. Need for Reform and Overview of Rule Proposal
II. Discussion
    A. Proposed Amendments to Rule 203A-2(e)
    1. Operational Interactive Website
    2. Elimination of De Minimis Non-Internet Client Exception
III. 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

[[Page 50077]]

    C. Benefits and 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 Fewer Non-internet Clients
    2. Alternative Definitions of ``Interactive website''
    3. Eliminating the Internet Adviser Exemption
IV. Paperwork Reduction Act
    A. Introduction
    B. Rule 203A-2(e) Recordkeeping Requirement
    C. Form ADV
    D. Total Hour Burden Associated With Proposed Amendments to Rule 
203A-2(e)
    E. Request for Comments
V. Initial Regulatory Flexibility Analysis
    A. Reason for and Objectives of the Proposed Action
    1. Proposed Amendments to Rule 203A-2(e)
    2. Proposed Amendments to Form ADV
    B. Legal Basis
    C. Small Entities Subject to the Rule and Rule Amendments
    1. Small Entities Subject to Amendments to the Internet Adviser 
Rule
    D. Projected Reporting, Recordkeeping and Other Compliance 
Requirements
    1. Proposed Amendments to Rule 203A-2(e)
    2. Proposed Amendments to Form ADV
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. Solicitation of Comments
VI. Consideration of Impact on the Economy
    Statutory Authority

I. Background

    We are proposing amendments to rule 203A-2(e) (``Internet Adviser 
Exemption'') 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 proposed 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 twenty years ago. The proposal would also amend Form ADV 
to conform certain instructions and definitions to the amended rule and 
would also require additional representations regarding an internet 
investment adviser's reliance on the rule.
    On January 1, 1997, 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.\2\ 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 advisers.\3\ Section 303 of NSMIA 
amended the Advisers Act to include section 203A \4\ 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,\5\ and preempt state adviser statutes regarding 
registration, licensing, or qualification as to advisers registered 
with the Commission.\6\ Advisers prohibited from registering with the 
Commission remain subject to the regulation of state securities 
authorities.\7\ The ``$25 million assets under management'' test was 
designed by Congress to distinguish investment advisers with a national 
presence from those that are essentially local businesses.\8\ Congress 
expressed that its goal in enacting the statute was to more efficiently 
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 to investment advisers of 
the overlapping and duplicative regulation between Federal and State 
regulators.\9\ Congress furthered this objective on July 21, 2010 with 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-
Frank Act''),\10\ which 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, those that have between 
$25 million and $100 million of assets under management.\11\
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    \2\ National Securities Markets Improvement Act of 1996, Public 
Law 104-290, 110 Stat. 3416 (1996) (codified in various sections of 
15 U.S.C.).
    \3\ See S. Rep. No. 293, 104th Cong., 2d Sess. 3-4 (1996) 
(``Senate Report''), at 4.
    \4\ Public Law 104-290, Sec. 303; see also section 203A of the 
Advisers Act [15 U.S.C. 80b-3a].
    \5\ Section 203A(a)(1) of the Advisers Act [15 U.S.C. 80b-
3a(a)(1)].
    \6\ Section 203A(b) of the Advisers Act [15 U.S.C. 80b-3a(b)].
    \7\ 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 n.83.
    \8\ See Senate Report, supra note 3, 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.'').
    \9\ See Senate Report, supra note 3, 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.'').
    \10\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law No. 111-203, 124 Stat. 1376 (2010).
    \11\ Unlike a small adviser, a mid-sized adviser is not 
prohibited from registering with the Commission: (i) if the adviser 
is not required to be registered as an investment adviser with the 
securities commissioner (or any agency or office performing like 
functions) of the state in which it maintains its principal office 
and place of business; (ii) if registered, the adviser would not be 
subject to examination as an investment adviser by that securities 
commissioner; or (iii) if the adviser is required to register in 15 
or more states. See section 410 of the Dodd-Frank Act; section 203A 
of the Advisers Act.
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    Congress has recognized, however, that it would be 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 us if the 
prohibition would be ``unfair, a burden on interstate commerce, or 
otherwise inconsistent with the purposes of [section 203A].'' \12\ In 
exercising this authority, the Commission in 2002 adopted the Internet 
Adviser Exemption, which relieves certain advisers that provide 
advisory services primarily through the internet from the burdens of 
multiple state regulation and allows them to register with the 
Commission.\13\
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    \12\ Section 203A(c) of the Advisers Act [15 U.S.C. 80b-3a(c)]. 
See also Senate Report, supra note 3, at 5 and 15.
    \13\ See Exemption for Certain Investment Advisers Operating 
Through the Internet, Investment Advisers Act Release No. 2028 (Dec. 
12, 2002) [67 FR 19500 (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 rule 
203A-2.
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A. Current Rule 203A-2(e)

    The Internet Adviser Exemption was designed to create a narrow 
exemption from the prohibition on registration for certain advisers 
(``internet investment advisers''), which typically do not manage the 
assets of their clients or advise a registered investment company, and 
thus do not meet the statutory thresholds for registration with the 
Commission.\14\ These advisers,

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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.'' \15\ The Commission concluded that, ``as applied to these 
advisers, the application of the prohibition on Commission registration 
would be ``unfair, a burden on interstate commerce, or otherwise 
inconsistent with the purposes of [section 203A].'' \16\ Under the 
current Internet Adviser Exemption, an adviser is exempt from the 
prohibition on Commission registration if the adviser:
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    \14\ See 2002 Adopting Release, supra note 13. The Commission 
originally adopted the Internet Adviser Exemption as rule 203A-2(f) 
and redesignated it as rule 203A-2(e) effective Sept. 19, 2011. 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)] (``2011 Redesignation'').
    \15\ 2002 Adopting Release, supra note 13, at section II (citing 
Section 203A(c)).
    \16\ Id.
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     Provides investment advice to all of its clients 
exclusively through an interactive website, except it may provide 
investment advice to fewer than 15 clients through other means during 
the preceding 12 months;
     Maintains a record demonstrating that it provides 
investment advice to its clients exclusively through an interactive 
website in accordance with the limits described in the bullet point 
above; and
     Does not control, is not controlled by, and is not under 
common control with, another investment adviser registered with the 
Commission solely in reliance on an adviser registered under the 
Internet Adviser Exemption.
    As the 2002 Adopting Release explained, absent the Internet Adviser 
Exemption, Internet investment advisers would likely incur the burden 
of temporarily registering in multiple states and later withdrawing. 
State investment adviser registration statutes generally obligate 
advisers to register in every state in which the adviser obtains more 
than a de minimis number of clients. The 2002 Adopting Release reasoned 
that because internet investment advisers provide investment advice to 
their clients through an interactive website, they are likely to have 
no physical local presence in a community or state, with little or no 
in-person contact with advisory clients. Accordingly, the adviser's 
clients can come from any state, at any time. As a result, an internet 
investment adviser would have to, as a practical matter, register in 
multiple states to ensure that its registration will be in place when 
or if it obtains the requisite number of clients from any particular 
state. Further, an internet investment adviser may subsequently become 
eligible for an existing exemption under 17 CFR 275.203A-2(d) (``rule 
203A-2(d)''), permitting Commission registration for advisers otherwise 
obligated to register in at least 15 states, but typically not before 
the adviser had already incurred the burden of registering, and 
potentially deregistering, in multiple states.\17\
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    \17\ 17 CFR 275.203A-2(d). 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. At the time the Internet Adviser Exemption was adopted, the 
``multi-state adviser exemption'' enabled an investment adviser who 
was required to register as an investment adviser with 30 or more 
states to register with the Commission. See 2002 Adopting Release, 
supra note 13, at section II.A. Effective September 19, 2011, the 
Commission amended the multi-state exemption to enable Commission 
registration for advisers otherwise obligated to register in at 
least 15 states, rather than 30 states, and renumbered the multi-
state exemption rule 203A-2(e) as rule 203A-2(d). See 2011 
Redesignation, supra note 14, at section II.A.5.c and n.118.
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    From the adoption of the Internet Adviser Exemption through 
December 31, 2022, approximately 845 advisers have relied on the 
exemption as a basis for registration with the Commission.\18\ Of these 
advisers, 718 initially registered exclusively in reliance on the 
Internet Adviser Exemption. As of December 31, 2022, approximately 256 
advisers were relying exclusively on the Internet Adviser Exemption. 
The exemption has been used with increasing frequency recently, with 
149 of the 256 advisers relying exclusively on the exemption 
registering after 2015.
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    \18\ Based on analysis of Form ADV data.
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B. Need for Reform and Overview of Rule Proposal

    The asset management industry has experienced substantial growth 
and change since the rule was adopted over twenty 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 means.\20\ The use of technology 
is now central to how many investment advisers provide their products 
and services to clients.\21\ 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 
retail investors, in particular, 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.\22\ 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 uptick 
in the number of advisers seeking to rely on the Internet Adviser 
Exemption.\23\ We recognize that investment advisers are increasingly 
utilizing a wide range of technologies in their businesses. The 
Internet Adviser Exemption, however, was intended as a narrow exemption 
for entities that are in the business of exclusively providing

[[Page 50079]]

investment advice through an interactive website.\24\
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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 $115 trillion assets under management as of 
Dec. 2022. Based on analysis of Form ADV data.
    \20\ See, e.g., 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\ We note that the Commission is also proposing rules 
requiring broker-dealers and investment advisers to eliminate or 
neutralize certain conflicts of interest associated with their use 
of technologies that optimize for, predict, guide, forecast, or 
direct investment-related behaviors or outcomes, directly or 
indirectly. These proposed rules derive, in part, from the 
Commission's recognition that investment advisers in their 
interactions with investors are increasingly using, among other 
technologies, predictive data analytics, artificial intelligence, 
including machine learning, deep learning, neural networks, natural 
language processing, and large language models, as well as other 
technologies that make use of historical or real-time data, lookup 
tables, or correlation matrices. See Conflicts of Interest 
Associated with the Use of Predicative Data Analytics by Broker-
Dealers and Investment Advisers, Investment Advisers Act Release No. 
6353 (July 26, 2023).
    \22\ 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 
Oct., a 31% jump over Sept.'s pace).
    \23\ 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 256 advisers as of Dec. 2022.
    \24\ See 2002 Adopting Release, supra note 13, at section II.A.
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    Our examination staff has observed numerous compliance deficiencies 
by advisers relying on the rule.\25\ For example, in 2021 the staff 
noted 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.'' \26\ As part of the examinations described in the Risk 
Alert, 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.\27\ Advisers registered under rule 203A-2(e) providing advice 
to 15 or more clients other than through the adviser's interactive 
website during the preceding twelve months may not rely on this 
exemption.\28\
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    \25\ See 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.
    \26\ Id. at 8. The Risk Alert noted that this has been a common 
finding for many years. Id. at n.28. The Commission has cancelled 
the registration of advisers claiming reliance on the Internet 
Adviser Exemption for not satisfying the requisite conditions and 
also brought actions against them. See, e.g., 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) (``Ajenifuja'') (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). See also 
In re. RetireHub, Inc., Investment Advisers Act Release No. 3337 
(Dec. 15, 2011) (settled) (``RetireHub'') (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).
    \27\ Risk Alert, supra note 25, at 8.
    \28\ See rule 203A-2(e)(1)(i).
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    Moreover, the Internet Adviser Exemption is unavailable to an 
internet investment adviser if another adviser in a control 
relationship with the internet investment adviser relies on the 
Internet investment adviser's registration under the rule as the basis 
for its own registration.\29\ The staff observed 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.\30\
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    \29\ See rule 203A-2(e)(1)(iii); see also 2002 Adopting Release, 
supra note 13 (discussing that this provision is meant to address 
the concern that an internet investment adviser intent on evading 
the restrictions on non-internet clients under the rule might 
attempt to organize a subsidiary firm to serve its non-internet 
clients, and assert rule 203A-2(b) as a basis to register the 
subsidiary with the Commission, even though the subsidiary does not 
manage the minimum amount of client assets required for registration 
with the Commission).
    \30\ See Risk Alert, supra note 25, at 8.
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    As discussed above, the exemption has been used with increasing 
frequency recently.\31\ 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 Internet Adviser 
Exemption.\32\ 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.\33\
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    \31\ See supra note 23.
    \32\ As an example, 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 Act (and related rules). See supra note 
26. 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) (``Boyeda'')).
    \33\ Based on analysis of Form ADV data.
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    Given that internet investment advisers may have characteristics 
that distinguish them from other types of investment advisers 
contemplated by Congress when it added section 203A to the Act, the 
Commission established a ``narrow exemption,'' allowing certain 
investment advisers to register with the Commission despite managing 
less than the minimum threshold in assets under management.\34\ This 
narrow exemption was intended to divide regulatory authority over 
advisers that, unlike state-registered advisers, have no local presence 
and whose advisory activities are not limited to one or a few 
states.\35\ While some advisers have used the exemption as intended, 
others have used this exemption by registering with the Commission 
while failing to satisfy the conditions of the exemption. As discussed 
above, some of these advisers have not provided investment advice to 
any clients through an interactive website, in some cases for three or 
four years.\36\ Advisers with very limited or zero clients are more 
akin to local businesses that can be effectively regulated by one or a 
few states, consistent with Congress's intent in NSMIA's amendments to 
the Advisers Act.\37\ Moreover, some of the advisers relying on this 
exemption provided advisory personnel who could expand upon the 
investment advice provided by the adviser's interactive website or 
otherwise provide investment advice to clients without consideration of 
the 15 non-internet clients per 12-month period de minimis exception 
within the Internet Adviser Exemption.\38\ Certain of these advisers 
have failed to produce copies of books and records required for 
advisers relying on the exemption, including books and records 
necessary to demonstrate compliance with the exception for providing 
non-interactive website-based advice to fewer than 15 clients in a 12-
month period.\39\ The number of registration applications and approvals 
under this exemption have increased, while the number of cancellations, 
withdrawals, and registration reliance changes resulting from an 
inability to meet the conditions of the rule also increased. 
Accordingly, in 2021 the Commission issued a request for information 
and comments

[[Page 50080]]

on the Internet Adviser Exemption, among other areas.\40\
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    \34\ See supra note 14 and accompanying text.
    \35\ See 2002 Adopting Release, supra note 13, at section II.
    \36\ See supra note 26.
    \37\ See also infra section III.B.2, stating that as of Dec. 
2022, 266 advisers rely on the internet adviser exemption. Of those 
advisers, 101 (38%), report zero clients. The median number of 
reported clients is six. The data comes from Form ADV filings 
received by the Commission through Mar. 31, 2023.
    \38\ See RetireHub, supra note 26 (finding that RetireHub 
employed on-campus representatives at the university who were made 
available to provide investment advice to university employees).
    \39\ See Boyeda, supra note 32 (finding that the firm violated 
section 204(a) of the Advisers Act by failing to furnish to the 
Commission copies of books and records that the firm was required to 
make, keep, and provide to representatives of the Commission 
pursuant to an examination).
    \40\ See 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)] (``2021 RFC''). The Commission received numerous comments 
in response to the 2021 RFC, which we considered in developing this 
proposal. Comment letters received in response to the 2021 RFC are 
available at: https://www.sec.gov/comments/s7-10-21/s71021.htm.
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    We believe that the ``narrow exemption'' created over twenty years 
ago should be amended to reflect its intended, narrow use in light of 
technological advances and changes in the investment adviser 
industry.\41\ In addition, this would further the investor protection 
objectives that Congress expressed when designing section 203A of the 
Advisers Act by better allocating the Commission's limited oversight 
and examination resources to those advisers that should be subject to 
national rules.\42\ In light of these observations and as discussed in 
more detail below, we are proposing certain targeted amendments to rule 
203A-2(e) with certain corresponding amendments to Form ADV.
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    \41\ See supra note 21 and accompanying text.
    \42\ See supra note 9.
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II. Discussion

A. Proposed Amendments to Rule 203A-2(e)

    Using the authority provided by section 203A(c) of the Act, we are 
proposing amendments to the internet Adviser Exemption to reflect 
developments since the adoption of the rule. The amendments we are 
proposing to the internet Adviser Exemption would require internet 
investment advisers relying on the internet Adviser Exemption to at all 
times have an ``operational'' interactive website.\43\ We also are 
proposing to eliminate the de minimis exception in the current rule 
that permits internet investment advisers to have fewer than 15 non-
internet clients in any 12-month period. In light of the widespread use 
of the internet, as well as the relative ease of building and 
maintaining a website and applications, we propose requiring that 
internet investment advisers have an operational interactive website at 
all times during which the internet investment adviser relies on the 
Internet Adviser Exemption. We also propose that this exemption should 
only be available to those advisers that provide advice exclusively to 
clients through an operational interactive website.
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    \43\ See proposed rule 203A-2(e)(1)(i).
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    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.\44\ 
The proposed amendments would adapt the rule to the broader evolution 
in technology and the marketplace, and would better align current 
practices in the investment adviser industry with the narrow exemption 
that was intended to reflect the allocation of responsibility for 
regulating investment advisers set forth by Congress under NSMIA and 
the Dodd-Frank Act. In addition, the proposed amendments would 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 sufficient local presence to be 
regulated by the states.
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    \44\ See supra note 24.
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1. Operational Interactive Website
    The current Internet Adviser Exemption requires, among other 
things, that an internet investment adviser 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.\45\ The 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. We are proposing the following targeted 
amendments:
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    \45\ See rule 203A-2(e)(1)(i).
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     First, we are proposing to amend the ``interactive 
website'' defined term to ``operational interactive website.''
     Second, we are proposing to define an ``operational 
interactive website'' to mean 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).
     Third, we are proposing to define ``digital investment 
advisory service'' 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.
     Finally, we are proposing to require that an internet 
investment adviser provide advice through an operational interactive 
website at all times during which the internet investment adviser 
relies on the Internet Adviser Exemption.
    The amendments are designed to modernize the definitions and to 
adapt the rule more broadly to the evolution of the asset management 
industry.
    The proposed amendments specify that an internet investment adviser 
must provide digital investment advisory services through its website 
on an ongoing basis to more than one client. 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, 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. The proposed amendments also specify that the 
requirement to provide an operational interactive website would 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).\46\ Currently, the Internet Adviser Exemption does 
not specify that an interactive website be ``operational,'' whether at 
the time of registration or otherwise. Further, in the 2002 Adopting 
Release, the Commission did not specify the timing of when the 
interactive website must be operational, though no grace period exists 
under the current rule.\47\ With advances in

[[Page 50081]]

technology since the adoption of the rule more than twenty years 
ago,\48\ we believe that advisers seeking to rely on the Internet 
Adviser Exemption can 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.\49\ Moreover, the 
requirement that an internet investment adviser must provide digital 
investment advisory services through its website on an ongoing basis to 
more than one client 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.
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    \46\ In the case of an existing registered investment adviser 
seeking to change its registration to rely on the Internet Adviser 
Exemption, the adviser would be required to have an operational 
interactive website at the time in which it begins relying on the 
rule.
    \47\ See Ajenifuja, supra note 26 (finding that rule 203A-2(e) 
does not contain a grace period). The Commission stated in the 2002 
Adopting Release: ``Nor is it likely Internet Investment Advisers 
could rely on rule 203A-2(d) [redesignated as rule 203A-2(c), see 
2011 Redesignation, supra note 14 to carry them through an initial 
period of operation without state registration in anticipation of 
eligibility under the multi-state exemption. If an adviser relying 
on [redesignated] rule [203A-2(c)] has not become eligible for SEC 
registration within 120 days, it must withdraw its registration.'' 
2002 Adopting Release, supra note 13, at section IV.A. Given 
advances in technology, we preliminarily believe that internet 
investment advisers should be able to develop, test, and deploy an 
operational interactive website and begin serving clients within 120 
days.
    \48\ See generally, Max Roser, Hannah Ritchie and Edouard 
Mathieu, Technological Change (Mar. 2022), https://ourworldindata.org/technological-change (compiling statistics of 
technological growth); Martin Armstrong, How Many Websites Are 
There? (Aug. 6, 2021), https://www.statista.com/chart/19058/number-of-websites-online/ (showing growth from inception of the internet 
to approximately 1.88 billion websites in 2021); Total Number of 
Websites (accessed July. 11, 2023), https://www.internetlivestats.com/total-number-of-websites/ (identifying, 
among others, 38,760,373 websites in 2002 and 1,106,671,903 websites 
in 2023).
    \49\ If the adviser is initially relying on rule 203A-2(c) as a 
basis for registration (``120-day rule''), the interactive website 
would need to be operational within 120 days of the adviser's 
registration. For example, an adviser could register with the 
Commission in anticipation of reliance on the Internet Adviser 
Exemption by using the 120-day rule, have 0 clients with no website, 
and within 120 days create an operational interactive website and 
obtain more than one client, then file an amendment to its Form ADV 
indicating that it has become eligible for the Internet Adviser 
Exemption.
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    The proposed definition of ``operational interactive website'' is 
also designed to specify the rule's application to advisers' use of 
technology, including their use of mobile applications, in connection 
with their eligibility to rely on the rule.\50\ Thus, the proposed 
changes would expressly permit an internet investment adviser to use 
mobile applications to provide investment advice to clients.\51\ It is 
appropriate to allow internet investment advisers using mobile 
applications to interact with advisory clients to rely on the Internet 
Adviser Exemption because clients increasingly access services, 
including investment advisory services, through mobile 
applications,\52\ and mobile applications can provide interactive 
functionality similar to the functionality of websites.\53\ By 
including mobile applications 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. We understand that mobile 
applications use various methods of communication, including, for 
example, push notifications, in-app messages, and similar forms of 
electronic communication. The amended rule would permit any form of 
mobile application technology through which the investment adviser 
provides digital investment advisory services.
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    \50\ See proposed rule 203A-2(e)(2).
    \51\ 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'').
    \52\ 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 U.S.], 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).
    \53\ See, e.g., techopedia, supra note 51 (``Mobile applications 
frequently serve to provide users with similar services to those 
accessed on PCs.''); see, e.g., 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.'').
---------------------------------------------------------------------------

    We also are proposing to define ``digital investment advisory 
services'' 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.'' \54\ The proposed definition is 
designed to address that, like the current rule, an adviser must 
provide investment advice exclusively through an interactive website. 
However, the proposed definition would 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. We understand that 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.\55\ The proposed amendments would specify that 
the investment advice to clients must be ``generated by'' the website's 
software-based models, algorithms, or applications.\56\ Like the 
current rule,\57\ this new definition is designed to reflect that an 
adviser's personnel are not permitted to generate, modify, or otherwise 
provide client-specific investment advice through the

[[Page 50082]]

operational interactive website or otherwise.\58\ Said differently, 
human-directed client-specific investment advice, delivered through 
electronic means, would not be eligible activity under the Investment 
Adviser Exemption. The use of the internet or other electronic media to 
communicate with clients is not, alone, a sufficient basis for an 
adviser to rely on the exemption.\59\
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    \54\ See proposed 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, Investment Advisers Act 
Release No. 5248 (June 5, 2019), 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).
    \55\ See, e.g., Investment Adviser Association, 2020 Evolution 
Revolution (2020), at 8, https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/resources/Evolution_Revolution_2020_v8.pdf (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].''); Robo-Advisers, IM Guidance Update No. 
2017-02 (Feb. 2017), https://www.sec.gov/investment/im-guidance-2017-02.pdf (``Robo-Advisers Guidance''); Akin Ajayi, The Rise of 
the Robo-Advisers (July 16, 2015), https://www.credit-suisse.com/about-us-news/en/articles/news-and-expertise/the-rise-of-the-robo-advisers-201507.html (``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.'').
    \56\ As a fiduciary, investment advisers have a duty to make 
full and fair disclosure of all material facts to, and to employ 
reasonable care to avoid misleading, clients. Given the unique 
aspects of an 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.
    \57\ See 2002 Adopting Release, supra note 13, at section II.A.1 
(``[T]he exemption is for advisers that provide investment advice to 
their Internet clients `exclusively' through their interactive Web 
sites. An adviser relying on the exemption may not use its advisory 
personnel to elaborate or expand upon the investment advice provided 
by its interactive Web site, or otherwise provide investment advice 
to its Internet clients, except as permitted by the de minimis 
exception discussed below.'').
    \58\ This excludes human involvement and input other than to the 
degree necessary for technological oversight and management of a 
website's software-based models, algorithms, or applications. But 
see Comment Letter of Morningstar, Inc. (Oct. 1, 2021) 
(recommending, in response to the 2021 RFC, that the Commission 
should modify the Internet Adviser Exemption to explicitly permit 
human interaction for ``certain types of information''--for example, 
costs, allocations, financial education--``as long as the actual 
asset allocation is conducted by the algorithm.'').
    \59\ This treatment is unchanged from the current rule. See 2002 
Adopting Release, supra note 13, at section II.A.1 (``The rule is 
thus not available to advisers that merely use Web sites as 
marketing tools or that use Internet vehicles such as E-mail, chat 
rooms, bulletin boards and webcasts or other electronic media in 
communicating with clients . . . expansion of the rule to include 
such activities as suggested by some commenters could undermine 
NSMIA's allocation of regulatory responsibility over smaller 
advisers to state securities authorities.'').
---------------------------------------------------------------------------

    The proposed amendments would not prohibit advisory personnel from 
all interactions with advisory clients. Advisory personnel could 
continue to assist clients with technical issues in connection with the 
use of the website (e.g., accessing the website, etc.), 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. As discussed below, the amended rule would not permit 
advisory personnel to provide investment advice of any kind to a 
client.
    We also are proposing that an adviser relying on the rule as a 
basis for registration must represent on Schedule D of its Form ADV 
that, among other things, it has an operational interactive 
website.\60\ This representation is similar to the representation that 
advisers relying on the multi-state exemption make on their Form 
ADV.\61\ This representation 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 an inability to meet the conditions of the 
rule. This amendment would 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, thus reinforcing the conditions of the 
exemption for the internet investment adviser.
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    \60\ See proposed rule 203A-2(e)(1)(iv).
    \61\ Rule 203A-2(d)(2)(i).
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    We request comment on all aspects of the proposed amendments 
relating to the requirements for internet investment advisers to have 
an operational interactive website and related amendments to Form ADV, 
including the following:
    1. Should we amend the interactive website definition to 
``operational interactive website,'' as proposed? Do commenters agree 
that the interactive website should be operational at all times an 
adviser is registered with the Commission and relying on the Internet 
Adviser Exemption?
    2. Does the hardship clause in the proposed definition of 
interactive website reasonably account for temporary outages? Should 
planned periods of inoperability, such as planned maintenance, be 
included, as proposed? Are there other instances in which an adviser 
intentionally takes an interactive website offline that should be 
explicitly discussed in the release? The proposed hardship clause 
specifies that the outages must be de minimis in duration? Should the 
rule text specify a particular time period instead, such as less than 6 
hours, 12 hours, or 24 hours?
    3. Should the exemption specify what it means to provide investment 
advice ``exclusively'' through the operational interactive website? If 
so, how? Is it sufficiently clear that the amended rule is not designed 
to prevent advisory personnel from assisting clients with technical 
issues or from explaining how the adviser's algorithm works? Are there 
any circumstances not accounted for in the amended rule in which 
advisory personnel interact with clients without engaging in digital 
investment advisory services?
    4. Do commenters agree that advisers seeking to rely on the 
proposed exemption could develop, test, and launch an operational 
interactive website within 120 days? Are there certain web-development 
issues that are unique to the investment adviser industry that would 
prevent the launch of an operational interactive website within 120 
days?
    5. Do commenters agree that advisers seeking to rely on the 
proposed exemption could develop a test interactive website that is not 
accessible to the public that subsequently could be made accessible to 
the public, including advisory clients, and become an operational 
interactive website at the time of registration as an internet 
investment adviser or within 120 days of registration under the 120-day 
rule? Generally, do commenters agree that initial registration in 
reliance on the 120-day rule may not be challenging for advisers in the 
way that it may have been when the Commission adopted the Internet 
Adviser Exemption?
    6. Is the requirement that an internet investment adviser must 
provide digital investment advisory services through its website on an 
ongoing basis to more than one client appropriate? Should we require 
that the internet investment adviser provide digital investment 
advisory services to ``one or more clients'' instead? Alternatively, 
should we require a de minimis number of clients or some other exact 
number of clients (e.g. ``no fewer than 6 clients'' to align with 
section 222 of the Advisers Act)?
    7. Should we include mobile applications in the definition of 
interactive website, as proposed? Do commenters agree that customers 
increasingly access investment advisory services through mobile 
applications? Do commenters agree that mobile applications can provide 
interactive functionality similar to the functionality of websites?
    8. Are there other technologies similar to websites and mobile 
applications that commenters believe should be included in the 
definition of operational interactive website? For instance, should the 
definition include computer programs or software, which may not be a 
website or a mobile application? Alternatively, should the definition 
include a broader reference to ``digital platform'' or some other 
language instead of ``website or mobile application''?
    9. Would requiring an affirmative representation on Schedule D to 
Form ADV that an adviser relying on the Internet Adviser Exemption has 
an operational interactive website, as proposed, be useful for advisers 
by reinforcing the conditions of the proposed rule? Why or why not?
    10. Generally, is there a need for the Internet Adviser Exemption 
given the changes in technology and wide use of websites and/or mobile 
applications by investment advisers to advertise and provide investment 
advisory services?
2. Elimination of De Minimis Non-Internet Client Exception
    The current rule includes a de minimis exception that permits an 
internet investment adviser to provide investment advice to fewer than 
15 non-

[[Page 50083]]

internet clients during the preceding 12 months.\62\ We are proposing 
to amend the rule to remove this de minimis exception, such that an 
internet investment adviser must provide advice to all of its clients 
exclusively through an interactive website.\63\
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    \62\ See rule 203A-2(e)(1)(i).
    \63\ See proposed rule 203A-2(e)(1)(i). But see Comment Letter 
of Wilson Sonsini Goodrich & Rosati, P.C. (Oct. 4, 2021) (``Wilson 
Sonsini Comment Letter'') (asserting, in response to the 2021 RFC, 
that the current rule is not permissive enough with respect to the 
advising of non-internet clients, further suggesting that the 
Internet Adviser Exemption should be available to any investment 
adviser that provides investment advice solely through the internet 
to at least 51% of its customers'').
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    The Commission included the non-internet client 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.\64\ In considering whether to retain the de 
minimis exception in this rule, we took into account the basis of the 
narrow exception, and the Commission's experience administering the 
rule. We preliminarily believe, as discussed below, that there is not 
the same need for this exception now as at the time we originally 
adopted it. Accordingly, under these proposed amendments, if an 
internet investment adviser is advising non-internet clients, it would 
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.
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    \64\ 2002 Adopting Release, supra note 13, at section I. When 
the Commission initially adopted the fewer than 15 client de minimis 
exception, the Commission noted its similarity to the (then-
existing) ``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 2011 Redesignation, supra 
note 14, at n.4.
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    In addition, certain internet investment advisers may be able to 
register with the Commission using separate bases for registration. As 
such, an internet investment adviser would be less likely today to lose 
its ability to remain registered with the Commission as a result of 
taking on a client that would disqualify the adviser from relying on 
the Internet Adviser Exemption. As of December 31, 2022, ten advisers 
are dually registered with the Commission under both the Internet 
Adviser Exemption and another basis for registration.\65\ For example, 
contrary to the practice of internet investment advisers at the time 
the Commission adopted the Internet Adviser Exemption,\66\ our staff 
has observed that the operations of certain investment advisers that 
provide advice over the internet have changed such that they now manage 
assets of their internet clients.\67\ Accordingly, depending on assets 
under management, certain internet investment advisers may be 
eligible--or required--to register with us.\68\ In addition, due in 
part to the evolution of technology, investment advisers can 
appropriately manage advertisements, account openings, and similar 
operations, and, as a consequence, be able to better control in which 
states they may be required to register. Since the adoption of the rule 
over 20 years ago, it has become more common for internet businesses to 
implement technology that targets and tracks the locations in which 
they offer services.\69\ Moreover, the Dodd-Frank Act reduced the 
minimum number of states in which an adviser would be required to 
register before becoming eligible for the multi-state exemption, making 
it more likely that an adviser would be eligible for the multi-state 
exemption earlier and more easily than at the time of adoption of the 
Internet Adviser Exemption in 2002.\70\ Taken together, these 
regulatory and technological changes make the de minimis exception in 
the Internet Adviser Exemption less necessary than at the time we 
originally adopted the exemption.\71\
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    \65\ Based on analysis of Form ADV data.
    \66\ See 2002 Adopting Release, supra note 13, at section IV.A. 
(stating that ``Internet Investment Advisers typically would not 
initially be eligible to register with us, as they do not manage the 
assets of their Internet clients.'').
    \67\ See, e.g., Robo-Advisers Guidance, supra note 55 (``Robo-
advisers, which are typically registered investment advisers, use 
innovative technologies to provide discretionary asset management 
services to their clients through online algorithmic-based 
programs.''). Robo-advisers typically do not rely on the Internet 
Adviser Exemption when they are eligible for Commission registration 
based on regulatory assets under management.
    \68\ See, e.g., rule 203A-1.
    \69\ See John T. Holden, Marc Edleman, A Short Treatise on 
Sports Gambling and the Law: How America Regulates its Most 
Lucrative Vice, 907 Wisconsin Law Review (2020), https://wlr.law.wisc.edu/wp-content/uploads/sites/1263/2021/10/15-Holden-Edelman-To-Print.pdf (illustrating this in the context of online 
gambling platforms and stating that ``any company that is licensed 
to operate an online sportsbook must limit access to individuals 
physically located within the state where they have received their 
license. To illustrate this point, if a company has a license to 
operate an online sportsbook in New Jersey, that company may accept 
bets from any individual of legal age (other than self-excluded or 
prohibited individuals) that is physically located in New Jersey at 
the time of placing the bet. By contrast, even a licensed New Jersey 
online sportsbook may not accept bets from people, including New 
Jersey residents, who are physically located outside of New Jersey 
at the time of the attempted bet. Therefore, it is critical that any 
licensed online sportsbook implement proper geo-tracking technology 
to ensure that all bettors are based in permissible locations.'').
    \70\ See Dodd-Frank Act, Section 410 (amending section 203A of 
the Advisers Act to enable a mid-sized adviser to register with the 
Commission if it would be required to register in 15 or more 
states).
    \71\ See rule 203A-2(d). As noted above, technological advances 
related to website development would better allow advisers to 
effectively utilize the 120-day rule in anticipation of reliance on 
the multi-state exemption relative to at the time we originally 
adopted the Internet Adviser Exemption.
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    We request comment on the proposed elimination of the de minimis 
exception in the Internet Adviser Exemption:
    11. Should the de minimis exception for non-internet clients be 
eliminated, as proposed? If so, should those internet investment 
advisers registered in reliance on the Internet Adviser Exemption prior 
to the adoption of the final rule continue to be able to rely on the de 
minimis exception? Do commenters agree that there is less of a need for 
this exception today than there was when it was originally adopted?
    12. For internet investment advisers that currently provide advice 
outside an interactive website, to what types of clients are you 
providing this advice, and how does this advice differ from advice 
provided through the interactive website?
    13. As an alternative to the proposal, should the de minimis 
exception remain at 15 as in the current rule? Should it be higher or 
lower? If, unlike as proposed, it should remain at 15 or some 
alternative number, is it consistent with the policy goals of the rule 
that an adviser relying on the rule should be permitted to advise a 
greater number of non-internet clients than internet clients during the 
specified timeframe? If, unlike as proposed, it should remain at 15 or 
some alternative number, should the rule require an equal or greater 
number of minimum internet clients? If the rule were to retain a de 
minimis exception, rather than specifying the exception as a numerical 
limit, should we instead require that the de minimis exception be a 
proportion of the number of internet clients an internet investment 
adviser has? For example, should an internet investment adviser be 
permitted to have a maximum of 51% of its clients as non-internet 
clients, as suggested by one commenter, or some greater or lesser 
percentage? \72\ Would such an approach be consistent with the policy 
goals of the rule of balancing the burdens of multiple state

[[Page 50084]]

registration requirements and the national presence for internet 
investment advisers with the Advisers Act's allocation of 
responsibility for regulating smaller advisers to state securities 
authorities? Would there be benefits to advisers from this approach and 
would those benefits justify the potential challenges in oversight? 
Should the de minimis exception be based on some other framework or 
calculation?
---------------------------------------------------------------------------

    \72\ Wilson Sonsini Comment Letter.
---------------------------------------------------------------------------

    14. If we were to retain a de minimis exception, should we add a 
question to Form ADV, asking how many non-internet clients the adviser 
had during the last fiscal year? Would this reporting requirement help 
internet investment advisers in their compliance and/or record keeping 
obligations with respect to the conditions of the exemption as 
currently constituted?
    15. Are there changes to the exemption that might help to encompass 
those investment advisers that provide advice through the internet 
while ensuring that advisers that otherwise are not eligible for 
registration with the Commission and that use the internet only as a 
marketing tool, for example, remain subject to state registration? 
Should the Commission create a registration exemption that reflects 
investment advisers' current use of technology in providing investment 
advice in a better way than the Internet Adviser Exemption?
    16. Should we adopt changes to the recordkeeping requirement? For 
example, should the recordkeeping requirement require advisers to 
record the frequency of communication with clients?
    17. Should we retain the Internet Adviser Exemption, or should we 
remove it in its entirety? In light of the other bases for registration 
that may be available to internet investment advisers, do commenters 
believe that the rule is necessary? Could these advisers simply rely on 
another applicable exemption (e.g., the multi-state exemption, mid-
sized adviser, related adviser)? Would eliminating the Internet Adviser 
Exemption and instead causing these advisers to rely on the multi-state 
exemption to register with the Commission better achieve our goals of 
only allowing advisers with a larger number of internet clients with a 
true national presence to register with us? Do commenters believe that 
certain advisers relying on the rule could instead register with the 
Commission based on having sufficient assets under management or an 
ability to rely on another exemption for registration? Do commenters 
believe that enough advisers rely on the rule to warrant the relative 
cost of oversight required for these advisers by our Staff?
    18. Is there any particular topic or issue that advisers encounter 
in complying with the Internet Adviser Exemption currently, or that 
they would encounter in complying with the proposed amendments to the 
exemption, that should be addressed by Commission guidance? Would the 
proposed amendments create excessive reliance on the Internet Advisers 
Exemption? If so, how?

III. 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.\73\ The following analysis 
considers the likely significant economic effects that may result from 
the proposed amendments 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 proposed amendments for efficiency, 
competition, and capital formation.
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    \73\ 15 U.S.C. 80b-2(c).
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    Where possible, the Commission quantifies the likely economic 
effects of its proposed amendments. 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.\74\ 
Further, in some cases, quantification would require numerous 
assumptions to forecast how investment advisers and other affected 
parties would respond to the proposed amendments, 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 proposed amendments 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 proposed amendments. 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.
---------------------------------------------------------------------------

    \74\ 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 amended rule would 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 proposed 
amendments include all advisers that are currently relying on the 
Internet Adviser Exemption, or are contemplating becoming an internet 
investment adviser under the current or proposed definition; their 
clients and affiliated parties; and users of Form ADV data.
1. Regulatory Baseline
    The 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.\75\ Currently, 
subject to certain exceptions, only advisers that advise a registered 
investment company or have assets under management above $100 million 
are allowed to register with the Commission. All other advisers may be 
subject to state regulation and may be required to register with one or 
multiple states.\76\
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    \75\ See supra notes 2, 3, and the relevant discussion in 
section 1.
    \76\ See supra note 7; section 222 of the Advisers Act.
---------------------------------------------------------------------------

    However, section 222(d) of the Advisers Act [15 U.S.C. 80b-18a(d)] 
provides that no law of any state ``shall require an investment adviser 
to register with the securities commissioner of the State'' if the 
adviser ``(1) does not have a place of business located within the 
State; and (2) during the preceding 12-month period, has had fewer than 
6 clients who are residents of that State.'' State law varies, and 
states may exempt from state regulation certain advisers with a place 
of business in that state if the adviser has a sufficiently low

[[Page 50085]]

number of clients.\77\ Depending on the 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.\78\ States may also require advisers to file copies of 
their Commission filings with the state (notice filings) even if state 
registration is not required.\79\
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    \77\ 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. 12 Sec.  130.805b) (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 a fewer than 6 clients 
in the state, in the preceding 12 months).
    \78\ Advisers that would otherwise have to register with 15 or 
more states may register with the Commission using the multi-state 
exemption. See supra note 13 and section 1 for the relevant 
discussion. For information on the number of state-registered 
investment advisers, see e.g., NASAA, NASAA 2022 Investment Adviser 
Section Annual Report (Apr. 2022), https://www.nasaa.org/wp-content/uploads/2022/06/2022-IA-Section-Report-FINAL-updated-05192022.pdf.
    \79\ 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. State. 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.\80\ The multi-state 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.\81\ 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).\82\ Under current rule 203A-2(e), 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. 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).\83\
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    \80\ 15 U.S.C. 80b-3a(c).
    \81\ See 2002 Adopting Release, supra note 13, and section I, 
for the relevant discussion.
    \82\ See 2002 Adopting Release, supra note 13, 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 few states.'' At that time, the threshold for the milti-state 
exemption was registration in 30 states rather than 15.
    \83\ See rule 203A2(e)(1)(ii); relevant discussion in supra 
section I.A.
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2. Current Use of the Internet Adviser Exemption
    As of December 2022, there were 15,360 registered investment 
advisers with $115,050 billion regulatory assets under management. Of 
these, 256 (1.7%) with a combined total of $2.94 billion in regulatory 
assets under management (0.003%) exclusively relied on the Internet 
Adviser Exemption, while 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 266, 190 of which were small entity 
registered investment advisers.\84\
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    \84\ The data comes from Form ADV filings received by the 
Commission through Mar. 31, 2023. Small entity investment advisers 
are advisers with less than $25 million in regulatory assets under 
management.
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    As of December 2022, registered internet investment advisers had on 
average 5,506 clients, with a minimum of 0 clients, reported by 101 
advisers, and a maximum of 522,345 clients.\85\ The median number of 
clients for all advisers using the exemption was 6, indicating that the 
distribution is highly skewed. As of December 2022, 101 advisers (38% 
of 266) reported advising 0 clients, 5 advisers (1.9% of 266) reported 
advising 1 client, and 37% of internet investment advisers (98 of 266) 
advised 2 to 100 clients. Only 18 advisers (7% of 266) reported 
advising more than 5,000 clients. Figure 1 demonstrates that 40% of 
internet advisers have fewer than 2 clients.
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    \85\ The data comes from Form ADV filings received by the 
Commission through Mar. 31, 2023.

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[[Page 50086]]

[GRAPHIC] [TIFF OMITTED] TP01AU23.046

    The largest categories of clients that internet investment advisers 
currently have are: non-high net worth individuals, pension plans, and 
high net worth individuals.\86\
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    \86\ 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 defines 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
                       Type of client                        clients per
                                                               adviser
------------------------------------------------------------------------
Non-high net worth individuals.............................        5,085
Pension plans..............................................          261
High net worth individuals.................................            2
------------------------------------------------------------------------
Data source: Form ADV filings received by the Commission through Mar.
  31, 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 204 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
                       Type of client                        clients per
                                                               adviser
------------------------------------------------------------------------
Non-high net worth individuals.............................          6.3
Pension plans..............................................          0.1
High net worth individuals.................................          0.7
------------------------------------------------------------------------
Data source: Form ADV filings received by the Commission through Mar.
  31, 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 multi-state exemption if they have clients in 15 or 
more states.\87\ But, we 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. We invite public comment on this topic.
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    \87\ The multi-state 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 was 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.\88\ 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 not more than one state.\89\ 
Additionally,

[[Page 50087]]

advisers now may be able to use technology and targeting advertisement 
in such a way as to limit the number of clients from certain states 
thereby reducing the state regulation burden.\90\
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    \88\ 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 5 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 July 2023, 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 July 10, 2023.
    \89\ 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, supra note 13, 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 supra, note 69 and 
surrounding text, today's investment advisers are better able to 
control in which states they may be required to register.
    \90\ See section II.A.2 for a relevant discussion.
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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.\91\ 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.
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    \91\ 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. 13, 2023), https://www.iard.com, under the tab ``Fees & 
Accounting.'' We invite public comment on the cost of state 
registration and notice filing fees.
---------------------------------------------------------------------------

    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 
invite public comment on the location of internet investment advisers 
and their clients, application of state law to internet investment 
advisers, reasons to seek the internet Adviser Exemption, and other 
relevant topics.
3. Increased Reliance on the Internet Adviser Exemption
    Use of the internet Adviser Exemption has increased since its 
adoption, especially in recent years.\92\ The number of investment 
advisers using the exemption at the end of 2022 (that is, 266 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.\93\ 
The value of regulatory assets under management for advisers 
exclusively relying on the internet Adviser Exemption at the end of 
2022 was $2.94 billion,\94\ or 0.003% of total adviser registered 
assets under management. The average regulatory assets under management 
per adviser for internet investment advisers (about $64.11 million) was 
165 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 2022, 440 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 475 Forms ADV-W.\95\ Note that the number 
of withdrawals has increased, for example, there were 69 ADV-W filings 
by internet investment advisers between 2003 and 2012 and 387 ADV-W 
filings between 2013 and 2022.\96\ This increase could suggest 
erroneous registration, as discussed later in this analysis.
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    \92\ See supra note 23 (number of advisers relying exclusively 
on the exemption grew from 107 in 2015 to 256 in 2022).
    \93\ 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, supra note 13, at 
77623.
    \94\ Accounting for inflation using CPI calculator (https://www.bls.gov/data/inflation_calculator.htm), this number is 1.83 
billion in Dec. 2003 dollars.
    \95\ 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).
    \96\ Based on analysis of Form ADV data available through Mar. 
31, 2023.
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    Technology use in the advisory industry has also changed. For 
example, while the 2002 Adopting Release stated that internet 
investment advisers might not be fully operational within 120 days of 
registration,\97\ 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.\98\ 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 and maintenance cost of 
about $1,000 per year.\99\
---------------------------------------------------------------------------

    \97\ Exemption for Certain Investment Advisers Operating Through 
the Internet, Investment Advisors Act Release No. 2091 [67 FR 77619 
(Dec. 18, 2002)], at 77622.
    \98\ 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.
    \99\ These estimates are available from Lucy Carney, How Much 
Does a Website Cost in 2023? (Full Breakdown), WEBSITEBUILDEREXPERT 
(Apr. 26, 2023), https://www.websitebuilderexpert.com/building-websites/how-much-should-a-website-cost/.
---------------------------------------------------------------------------

    As discussed in section I.A, 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 internet advice. 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.\100\ 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 2022 (387) was over five times larger than the number 
of withdrawals between 2003 and 2012 (69).\101\
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    \100\ See Risk Alert, supra note 25; see also supra note 26 and 
surrounding text.
    \101\ Based on the analysis of Form ADV data available through 
Mar. 31, 2023.
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C. Benefits and Costs and Effects on Efficiency, Competition, and 
Capital Formation

1. Benefits
    The proposed 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.\102\ Further, as discussed 
in more detail below, the proposed changes to the

[[Page 50088]]

definitions in the rule are designed to better align regulatory 
authority between the Commission and the states and improve investor 
protection. The proposed amendments would:
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    \102\ 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 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;
     Requiring more than one client to which the adviser 
provides digital investment advisory services on an ongoing basis;
     Adding the word ``operational,'' thus changing the term to 
``operational interactive website''; 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.
    Augmenting the definition of ``interactive website'' to include the 
new defined term ``digital investment advisory service'' would capture 
the increasing variety of technological methods by which internet 
investment advisers provide advice using the internet. Additionally, 
the proposed addition of the terms ``mobile application'' and 
``algorithms'' would 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.\103\ The improved definition thus would allow internet 
investment advisers that rely on mobile applications 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 would be able to benefit 
from being able to rely on mobile applications 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 website or mobile application 
so the internet investment adviser is not required to frequently 
withdraw and re-register due to minor or temporary technical 
difficulties or planned maintenance.
---------------------------------------------------------------------------

    \103\ See supra section II.A.1, specifically note 55 and 
surrounding text.
---------------------------------------------------------------------------

    To the extent advisers may be registering with the Commission in 
order to market themselves to potential clients, the proposed changes 
should help avoid misleading clients. For instance, advisers without an 
``operational'' website would be excluded from the pool of advisers 
eligible for the Internet Adviser Exemption. This would 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, while this is not in fact the case, the proposed amendments 
could help avoid the possibility of investors using a type of adviser 
they did not intend to use.
    The proposed amendments would 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 services the narrow-intended scope of t Internet heAdviser 
Exemption.\104\ This amendment would assist Commission staff in 
conducting examinations of internet advisers, because it can be 
difficult to identify the instances of advice given and the exact 
number of clients that received advice through means other than an 
operational interactive website.
---------------------------------------------------------------------------

    \104\ See supra section II.A.2.
---------------------------------------------------------------------------

    Additionally, the proposed amendments 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. Currently, prospective advisers need only check 
a box on Form ADV indicating they ``are an internet adviser relying on 
rule 203A-2e'' but the proposed change to Form ADV would include a 
separate text description of the actions the adviser must have taken to 
become or remain eligible for the Internet Adviser Exemption.\105\ 
Listing the required elements of eligibility for the Internet Adviser 
Exemption should explicitly state for the 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.\106\ We also anticipate 
that by avoiding erroneous registration, ineligible registrants would 
avoid expending time and effort on dealing with withdrawals, and 
corresponding legal fees.
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    \105\ 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.
    \106\ 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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    Currently, the Internet Adviser Exemption does not require an 
adviser to have a minimum number of clients. Requiring that digital 
investment advisory services be provided on an ongoing basis to more 
than one client would 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. 
Advisers with one or zero clients cannot be considered entities with 
national presence requiring relief from a state registration burden. 
Further, advisers with zero clients that effectively do not conduct 
advisory business but are able to register as internet investment 
advisers may be misleading potential future clients to believe they are 
providing advisory business via the internet.
2. Costs
    The proposed amendments may adversely affect some advisers. The 
proposed amendments would specifically require that the website be 
``operational,'' and advisers may incur a cost of developing a website 
or withdrawing their Commission registration if their website is not 
operational. Advisers should already have an interactive website and 
the Commission does not currently

[[Page 50089]]

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 proposed 
amendments should not require new website development costs.\107\
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    \107\ See supra note 49.
---------------------------------------------------------------------------

    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,\108\ implying a cost of withdrawal of $319 per 
adviser.\109\ 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. 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.\110\ We request public 
comment on this topic.
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    \108\ See, e.g., Submission for OMB Review; Comment request; 
Extension: Rule 203-2 and Form ADV-W, 88 FR 37913 (Jun. 9, 2023) 
(describing the burden associated with the previously approved 
collection of information under OMB Control No. 3235-0313).
    \109\ 0.75 hour * $425 = $319. The maximum total cost of 
withdrawals assuming all 256 currently registered internet 
investment advisers relying exclusively on the Internet Investment 
Adviser Exemption have to withdraw is 0.75 hour * $425 * 256 = 
$81,600. Assuming only 101 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 *106 = 
$33,788. 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.
    \110\ See supra note 65 and surrounding text (discussion of dual 
basis registration).
---------------------------------------------------------------------------

    Adding the term ``mobile applications'' and the term ``digital 
investment advisory service'' still may not prevent some non-internet 
advisers from relying on the exemption by claiming to provide mobile 
application or website-generated advice or ``digital investment 
advisory service'' when in fact the advice involves some human 
input.\111\ Such advisers are likely to incur costs of withdrawing 
their Commission registration.
---------------------------------------------------------------------------

    \111\ See, e.g., the findings in RetireHub, supra note 26.
---------------------------------------------------------------------------

    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 proposed amendments because they 
could no longer rely on the exemption as a basis for registering with 
the Commission. 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.\112\
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    \112\ 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 91.
---------------------------------------------------------------------------

    Similarly, the proposed amendments are designed to focus on 
advisers that exclusively advise 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 provide 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 some of their clients as well if 
the clients require more than digital investment advisory services in 
order to remain with the specific adviser. Further, the clients may 
have to switch to a different adviser. As discussed in section III.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.
    Finally, the proposed additional representation of eligibility on 
Schedule D of Form ADV may increase the time and effort advisers expend 
when filing Form ADV. However, as discussed in the PRA, such costs are 
expected to be minimal.\113\
---------------------------------------------------------------------------

    \113\ See supra section IV.C.
---------------------------------------------------------------------------

    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 registrations 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.\114\
---------------------------------------------------------------------------

    \114\ See also a related discussion in section II.A.2.
---------------------------------------------------------------------------

    The proposed 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.\115\ While reducing the number of advisers relying 
on the exemption is not a goal of the proposal, a reduction would 
reflect the narrow scope of the Commission's exemptive rule.\116\
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    \115\ See previous discussion in baseline on the number of 
internet investment advisers with zero (101) and one (5) client out 
of 266 total internet investment advisers.
    \116\ 2002 Adopting Release, supra note 13, 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 proposal 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 proposed change is small, and does not 
represent a significant portion of the population of investment 
advisers or their clients.
    The proposed 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, that can 
better fit their clients' needs

[[Page 50090]]

should improve client-adviser interactions, and the quality of the 
services provided, and could encourage client participation.
    However, the positive effects discussed above could be lessened by 
the fact that certain proposed 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 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 Fewer 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 proposed 
amendment to the exemption.
    However, as discussed in section II.A.2, 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 ``interactive website.'' A larger number 
of clients would 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 regulation, but that obtain one or a 
few clients with 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, disadvantage advisers with a small clientele or 
advisers which are at the early stages of starting their advisory 
business.
    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.
    Further, the definition of ``interactive website'' could use a 
definition of the term ``digital investment advisory services,'' other 
than ``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.'' For example, the definition of 
the term could be less specific, such as ``investment advice to clients 
that is generated based on personal information each client supplies 
through an operational interactive website.'' This alternative does not 
specify the type of technology used to generate advice, which allows 
more flexibility in technology use by internet investment advisers. 
However, this may result in non-internet advisers attempting to rely on 
the Internet Adviser Exemption by referencing a technology that is not 
typically used to provide investment advice via internet.
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 
current or proposed 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 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.\117\ Assuming 256 currently 
registered internet investment advisers relying exclusively on the 
Internet Adviser Exemption would have to withdraw from registration, 
the total cost of filing

[[Page 50091]]

Form ADV-W is estimated as $81,600.\118\
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    \117\ See supra note 108 and accompanying text.
    \118\ $425 * 0.75 hour per respondent * 256 advisers. The $425 
compensation rate is calculated as described supra, note 109.
---------------------------------------------------------------------------

    This alternative may also result in advisers losing some clients to 
the extent clients value Commission registration. Such clients would 
have to seek a different adviser and may face higher fees as well as 
switching costs as discussed above.\119\ 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 new and small advisers.\120\
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    \119\ 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. We invite public 
comment on this topic.
    \120\ See relevant discussion in section III.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.
---------------------------------------------------------------------------

    Such costs, however, 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). Moreover, state registration fees are typically the same 
as state notice filing fees,\121\ 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.
---------------------------------------------------------------------------

    \121\ See supra note 91.
---------------------------------------------------------------------------

Request for Comment
    19. What additional qualitative or quantitative information should 
be considered as part of the baseline for the economic analysis of the 
proposals?
    20. Do commenters agree with our characterization of the estimated 
benefits, burden hours, and costs? Please explain and supplement with 
data or estimates if available.
    21. Are the effects on competition, efficiency, and capital 
formation arising from the proposed amendments accurately 
characterized? Please explain, and provide data or estimates if 
available.
    22. Please provide data, if available, on the number of currently 
registered advisers that do not have an operational interactive 
website.
    23. Please provide data, if available, on the cost of setting up 
and maintaining an operational interactive website.
    24. Please provide data, if available, on the number of non-
internet clients of registered internet investment advisers.
    25. Please provide data, if available, on the location of internet 
investment advisers and their clients.
    26. Please provide data, if available, on the application of state 
law to internet investment advisers.
    27. For what reasons do investment advisers seek to use the 
Internet Adviser Exemption?
    28. Please provide data, if available, on the types of internet 
clients of registered internet investment advisers. What type of 
clients seek or prefer internet advisers? Do clients prefer internet 
advisers registered with the Commission?
    29. How would clients react if a previously-registered adviser was 
no longer registered with the Commission? How would current clients 
react if an internet adviser could no longer provide advice by means 
other than a website?
    30. Please provide data, if available, on the number of clients 
that may have to switch to a different adviser as a result of the 
proposed amendments.
    31. Please provide data, if available, on the clients an adviser 
may lose as a result of withdrawing from registration with the 
Commission, as well as the new advisers the clients may have selected.
    32. Are there known technological advances in advisory business 
other than ``models,'' ``algorithms,'' or ``applications'' generated 
advice that should be included in ``digital investment advisory 
service'' definition? Please explain.
    33. Is there a better term than ``operational,'' which can be used 
in the definition of ``interactive website''? Are there alternatives to 
the proposed items in the definition of ``interactive website''?
    34. Please provide any available estimates or data that can help 
estimate the average costs of state registrations, and of state notice 
filings.
    35. Please provide any available data regarding the advisers that 
currently rely on the Internet Adviser Exemption and will likely need 
to withdraw from registration with the Commission. How many of those 
advisers may face multiple state registrations if the exemption is 
eliminated?

IV. Paperwork Reduction Act

A. Introduction

    Our proposal would result in new ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\122\ The proposed amendments would have an impact on the 
current collection of information burdens of rule 203A-2(e) and Form 
ADV under the Act. The existing collections of information that we are 
proposing to amend are: (i) ``Exemption for Certain Investment Advisers 
Operating Through the Internet (Rule 203A-2(e))'' (OMB control number 
3235-0559); and (iii) ``Form ADV'' (OMB control number 3235-0049). The 
Commission is submitting these 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.
---------------------------------------------------------------------------

    \122\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    We discuss below these proposed amendments and new collection of 
information burdens. Responses provided to the Commission in the 
context of its examination and oversight program concerning the 
proposed amendments to rule 203A-2(e) subject to the provisions of 
applicable law. Responses to the disclosure requirements of the 
proposed amendments to Forms ADV are not kept confidential.

B. Rule 203A-2(e) Recordkeeping Requirement

    The amended rule would require an internet investment adviser to 
provide investment advice to all of its clients exclusively through an 
operational interactive website,\123\ and would 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.\124\ 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

[[Page 50092]]

amount to an average of four (4) hours annually per adviser.\125\
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    \123\ See proposed rule 203A-2(e)(1)(i).
    \124\ See proposed rule 203A-2(e)(1)(ii). Under the proposed 
rule, as under the current rule, advisers would need to maintain 
records of their compliance with the rule. The proposed change to 
remove the de minimis exception does not result in an increase in 
the burden under the current rule but it has been accounted for in 
our estimated burden for the proposed rule.
    \125\ The adviser would need to demonstrate that all of its 
clients obtain investment advice from the firm exclusively through 
an operational interactive website. Internet advisers that conduct 
their business exclusively through interactive websites and whose 
employees never directly communicate with clients would 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.
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    We estimate the number of respondents to this information 
collection to be 266 advisers.\126\ Accordingly, we estimate the total 
recordkeeping burden hours for all rule 203A-2(e) advisers to be 1,064 
hours.\127\ We estimate that the total monetized cost to each internet 
adviser to comply with the recordkeeping provision of rule 203A-2(e) 
would be approximately $1,700,\128\ and that the total monetized cost 
for the 266 advisers relying on this exemption at this time would be 
$452,200.\129\
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    \126\ This estimate is based on information reported by advisers 
through the Investment Adviser Registration Depository (``IARD''). 
Based on IARD data as of Dec. 31, 2022, of the approximately 15,360 
SEC-registered advisers, 266 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 
proposed amendments. 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.
    \127\ Four (4) hours x 266 advisers = 1,064 hours.
    \128\ 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.
    \129\ 1,064 hours x $425 per hour = $452,200. We do not expect 
advisers to incur any external cost burden in connection with this 
information collection because advisers registering under the rule 
would generate the necessary records in the ordinary course of their 
advisory businesses.
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C. Form ADV

    We are proposing amendments to Form ADV Part 1A, Schedule D, 
requiring 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 is continuing to rely on the 
internet adviser exemption, that it has provided--investment advice to 
all of its clients exclusively through an operational interactive 
website.\130\ 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 would 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 an inability 
to meet the conditions of the rule. We do not believe that these 
ministerial amendments to Form ADV requiring a very small number of 
advisers to check a box 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 Paperwork Reduction Act of 1995 (``PRA''). 
Accordingly, we are not revising any burden and cost estimates in 
connection with these amendments.
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    \130\ See proposed rule 203A-2(e)(1)(iv).
---------------------------------------------------------------------------

D. Total Hour Burden Associated With Proposed Amendments to Rule 203A-
2(e)

    We estimate investment advisers that would be subject to the 
amended rule would incur a total annual hour burden resulting from the 
collections of information discussed above of approximately 1,064 
hours, at a monetized cost of $452,200.\131\ The total external burden 
costs would be $0.
---------------------------------------------------------------------------

    \131\ This estimate is based upon the following calculation: 
1,064 hours x $425.
---------------------------------------------------------------------------

    A chart summarizing the various proposed components of the total 
annual burden for investment advisers with custody of client assets is 
below.

----------------------------------------------------------------------------------------------------------------
    Rule 203A-2(e) description of new                                                                External
              requirements                    Number of responses        Internal burden hours     burden costs
----------------------------------------------------------------------------------------------------------------
                      Final Estimates for Internet Investment Advisers under Rule 203A-2(e)
----------------------------------------------------------------------------------------------------------------
Annual burden for making records          266.......................  1,064 (4 hours per                       0
 sufficient to demonstrate compliance                                  adviser).
 with rule.
Annual burden for making representations  De Minimis................  De Minimis................               0
 on Form ADV, Part 1A, Schedule D.
----------------------------------------------------------------------------------------------------------------

    We estimate the total burden under proposed 203A-2(e) to amount to 
an average of four (4) hours annually per adviser. This estimate is 
identical to the estimate of the per-adviser burden under current 203A-
2(e). We believe that the only differences in burden hours and internal 
monetized costs between current 203A-2(e) and proposed 203A-2(e) will 
be determined by the number of advisers subject to the proposed rule.

E. Request for Comments

    We request comment on whether our estimates for burden hours and 
any external costs as described above are reasonable. Pursuant to 44 
U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (i) 
evaluate whether the proposed collections of information are necessary 
for the proper performance of the functions of the Commission, 
including whether the information will have practical utility; (ii) 
evaluate the accuracy of the Commission's estimate of the burden of the 
proposed collections of information; (iii) determine whether there are 
ways to enhance the quality, utility, and clarity of the information to 
be collected; and (iv) determine whether there are ways to minimize the 
burden of the collections of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    In addition to these general requests for comment, we also request 
comment specifically on the following issues:
    36. Our analysis relies upon certain assumptions, such as that 266 
advisers will rely on the Internet Adviser Exemption and that it will 
take advisers approximately 4 hours per year to comply with the 
recordkeeping requirements proposed. Do commenters agree with these 
assumptions? If not, why not, and what data would commenters propose?
    37. Our analysis relies upon the assumption that internet 
investment advisers will incur no meaningful

[[Page 50093]]

burden to make the proposed representations on Form ADV, Part 1A, 
Schedule D. Do commenters agree with this assumption? If not, why not, 
and what burden hours and costs would commenters propose?
    The agency is submitting the proposed collections of information to 
OMB for approval. Persons wishing to submit comments on the collection 
of information requirements of the proposed amendments should direct 
them to the Office of Management and Budget, Attention Desk Officer for 
the Securities and Exchange Commission, Office of Information and 
Regulatory Affairs, Washington, DC 20503, and should send a copy to 
Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549-1090, with reference to File No. 
S7-13-23. OMB is required to make a decision concerning the collections 
of information between 30 and 60 days after publication of this 
release; therefore, a comment to OMB is best assured of having its full 
effect if OMB receives it within 30 days after publication of this 
release. Requests for materials submitted to OMB by the Commission with 
regard to these collections of information should be in writing, refer 
to File No. S7-13-23, and be submitted to the Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 
20549-2736.

V. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory 
Flexibility Analysis (``IRFA'') in accordance with section 3(a) of the 
Regulatory Flexibility Act \132\ regarding our proposed rule.
---------------------------------------------------------------------------

    \132\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reason for and Objectives of the Proposed Action

1. Proposed Amendments to Rule 203A-2(e)
    We are proposing amendments to the internet Adviser Exemption, 
which we 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 twelve months; and
     Maintain records for a period of not less than five years 
demonstrating compliance with the conditions of the rule.
    The proposed changes to the internet Adviser Exemption are designed 
to reflect the evolution in technology and advisory industry since the 
adoption in the rule. In addition, the proposed changes 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 sufficient local presence 
to be regulated by the states.
    Specifically, the rule would 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 would be amended to ``operational interactive 
website'' and would be expanded to include mobile applications; the 
definition would also be amended to define operational interactive 
website as one through which the investment adviser provides digital 
investment advisory services on an ongoing basis to more than one 
client (except temporary technological outages of a de minimis 
duration).\133\ The amended rule would also remove the current rule's 
de minimis exception,\134\ which exception 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. As under 
the current rule, the amended rule would require advisers to comply 
with the requirement to maintain certain records in accordance with 
amended rule 203A-2(e)(1)(ii). The reasons for, and objectives of, the 
proposed 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 III and IV, which discuss 
the burdens on all advisers. The professional skills required to meet 
these specific burdens are also discussed in section IV.
---------------------------------------------------------------------------

    \133\ See proposed rule 203A-2(e)(2). For purposes of the rule, 
``digital investment advisory service'' would 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.
    \134\ See rule 203A-2(e)(1)(i).
---------------------------------------------------------------------------

2. Proposed Amendments to Form ADV
    The amended rule would 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 would assist Commission staff in 
connection with its review of registration applications and 
deregistrations of advisers that are not in compliance with the rule. 
The reasons for, and objectives of, the proposed 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 III and IV, which discuss the burdens on all 
advisers. The professional skills required to meet these specific 
burdens are also discussed in section IV.

B. Legal Basis

    The Commission is proposing to amend rule 203A-2(e) and amend 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)].

C. Small Entities Subject to the Rule and Rule Amendments

    In developing these proposals, we have considered their potential 
impact on small entities that would be subject to the proposed 
amendments. The proposed amendments would affect a relatively small 
number of investment advisers registered with the Commission, including 
some small entities.
    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 proposed amendments would 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

[[Page 50094]]

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 December 31, 2022, 
approximately 489 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 III (the Economic Analysis), the 
Commission estimates that based on IARD data as of December 31, 2022, 
approximately 266 investment advisers would be subject to the amended 
rule and the related proposed amendments to Form ADV. Of the 
approximately 489 SEC-registered advisers that are small entities under 
the RFA, 190 would be subject to the proposed amendments to rule 203A-
2(e) and the corresponding amendments to Form ADV.

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

1. Proposed Amendments to Rule 203A-2(e)
    The proposed amendments to rule 203A-2(e) would impose certain 
reporting and compliance requirements on investment advisers relying on 
the exemption for registration with the Commission, including those 
that are small entities. As under the current rule, all internet 
investment advisers, which we estimate to be 266 advisers,\135\ would 
be required to comply with the proposed rule's requirement to maintain 
records in accordance with amended rule 203A-2(e)(1)(ii).\136\ The 
proposed requirements and rule amendments, including compliance, 
reporting, and recordkeeping requirements, are summarized in this IRFA 
(section V.A., above). All of these proposed requirements are also 
discussed in detail, above, in sections I and II, and these 
requirements and the burdens on respondents, including those that are 
small entities, are discussed above in sections III and IV (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 IV.
---------------------------------------------------------------------------

    \135\ Based on IARD data as of Dec. 31, 2022.
    \136\ Proposed 203A-2(e)(1)(ii) is identical to current 203A-
2(e)(1)(ii) except for a conforming change to reflect the proposed 
requirement that the interactive website be ``operational.''
---------------------------------------------------------------------------

    As discussed above, approximately 489 small advisers were 
registered with us as of December 31, 2022, and we estimate that 190 of 
those small advisers registered with us would be subject to the 
proposed amendments (38.9% of all registered small advisers). As 
discussed above in our Paperwork Reduction Act Analysis in section IV 
above, the proposed amendments to rule 203A-2(e) under the Advisers Act 
would create an annual burden of approximately 4 hours per adviser, or 
760 hours in aggregate for small advisers.\137\ We therefore expect the 
annual monetized aggregate cost to small advisers associated with our 
proposed amendments to the Internet Adviser Exemption would be 
$323,000.\138\
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    \137\ 190 small advisers x 4 hours.
    \138\ 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. 760 hours x $425 = $323,000.
---------------------------------------------------------------------------

2. Proposed Amendments to Form ADV
    Proposed amendments to Form ADV would 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 would be required to represent on Schedule D of its Form 
ADV that it provides investment advice to all of its clients 
exclusively through an operational interactive website.\139\ An adviser 
registered under the rule and continuing to rely on the rule as a basis 
for its registration would be required to make a representation that it 
has provided investment advice to all of its clients exclusively 
through an operational interactive website.\140\ The proposed 
requirements and rule amendments, including recordkeeping requirements, 
are summarized above in this IRFA (section V.A). All of these proposed 
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 III and IV (the 
Economic Analysis and Paperwork Reduction Act Analysis) and below. The 
professional skills required to meet these specific burdens are also 
discussed in section IV.
---------------------------------------------------------------------------

    \139\ See proposed rule 203A-2(e)(1)(iv).
    \140\ See id.
---------------------------------------------------------------------------

    Our Economic Analysis (section III above) discusses these costs and 
burdens for respondents, which include small advisers. As discussed 
above in our Paperwork Reduction Act Analysis in section IV above, the 
proposed amendments to Form ADV would not increase the annual burden 
for advisers and would have no annual monetized cost.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission believes that there are no rules that duplicate, 
overlap, or conflict with the proposed rule amendments.

F. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives 
that would accomplish our stated objectives, while minimizing any 
significant adverse impact on small entities. We considered the 
following alternatives for small entities in relation to our proposed 
amendments to rule 203A-2(e) and the corresponding proposed 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 
proposed 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 proposed amendment to rule 
203A-2(e) and Form ADV. As discussed above, the proposed amendments are 
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 would 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 
sufficient local presence to be regulated by the states. We believe 
that these benefits should apply to clients of

[[Page 50095]]

smaller firms as well as larger firms. In addition, as discussed above, 
our staff would use the corresponding information that advisers would 
report on the proposed 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, would 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 
proposed rule. Such an exemption would be inconsistent with the 
intended purpose of the proposal, which, in part, is to provide 
regulatory relief from multiple state regulatory requirements. Small 
advisers are one of the primary beneficiaries of this exemption.
    Regarding the second alternative, we believe the current proposal 
is clear and that further clarification, consolidation, or 
simplification of the compliance requirements is not necessary. As 
discussed above, the amended rule would 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,\141\ and (iii) 
represent on Schedule D of its Form ADV that it provides investment 
advice to all of its clients exclusively through an operational 
interactive website.\142\ These provisions would better reflect the 
allocation of authority between the Federal government and States that 
Congress intended under NSMIA and the Dodd-Frank Act and would 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 sufficient local presence to be 
regulated by the states. Further, our proposal to require the 
representation on Schedule D of Form ADV would assist the Commission's 
examination and enforcement capabilities, including assessing 
compliance with rules, and therefore, it would provide important 
investor protections.
---------------------------------------------------------------------------

    \141\ See proposed rule 203A-2(e)(1)(i) and (ii). As with the 
current rule, the proposed rule amendments would provide that an 
internet investment adviser does not control, is not controlled by, 
and is not under common control with, another investment adviser 
registered with the Commission solely in reliance on an adviser 
registered under the Internet Adviser Exemption. See rule 203A-
2(e)(1)(iii); proposed rule 203A-2(e)(1)(iii).
    \142\ See proposed rule 203A-2(e)(1)(iv).
---------------------------------------------------------------------------

    Regarding the third alternative, we determined to use 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.

G. Solicitation of Comments

    We encourage written comments on the matters discussed in this 
IRFA. We solicit comment on the number of small entities subject to 
proposed amendments to rule 203A-2(e) and related amendments to Form 
ADV, as well as the potential impacts discussed in this analysis; and 
whether the proposal could have an effect on small entities that has 
not been considered. We request that commenters describe the nature of 
any impact on small entities and provide empirical data to support the 
extent of such impact.

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \143\ we must advise OMB whether a proposed 
regulation constitutes a ``major'' rule. Under SBREFA, a rule is 
considered ``major'' where, if adopted, it results in or is likely to 
result in (1) an annual effect on the economy of $100 million or more; 
(2) a major increase in costs or prices for consumers or individual 
industries; or (3) significant adverse effects on competition, 
investment or innovation.
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    \143\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    We request comment on the potential impact of the proposed rule 
amendments on the economy on an annual basis. Commenters are requested 
to provide empirical data and other factual support for their views to 
the extent possible.

Statutory Authority

    The Commission is proposing to amend rule 203A-2(e) and amend 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 Proposed Rules and Rule and Form Amendments

    For the reasons set out in the preamble, title 17, chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
1. The authority citation for part 275 continues to read 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 or mobile application through which the 
investment adviser provides digital investment advisory services on an 
ongoing basis to more than one client

[[Page 50096]]

(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 14. 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: July 26, 2023.
Vanessa A. Countryman,
Secretary.

    Note: The following appendix 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 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).
* * * * *

PART 1A

* * * * *
    Item 2. * * *
* * * * *
    (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 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:
    [square] I will provide investment advice to all of my clients 
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:
    [square] I have provided and will continue to provide investment 
advice to all of my clients exclusively through an operational 
interactive website.
* * * * *
[FR Doc. 2023-16287 Filed 7-31-23; 8:45 am]
BILLING CODE 8011-01-P