SEC tightens robo-advisor regulations

In a move aimed at enhancing investor protection in the digital age, the Securities and Exchange Commission (SEC) has recently amended its registration requirements for internet-based investment advisers. This pivotal update is designed to close loopholes that previously allowed certain advisers to register with the federal regulator under an outdated exemption, which some have termed “Robo-Advisors In Name Only” (RINOs).

Strengthening digital investment advisory: The SEC’s revamped rules

The SEC’s latest regulatory overhaul addresses critical gaps in the decades-old Internet Advisers Exemption. This rule, established in 2002, determined the registration jurisdiction for online investment advisers—whether with the SEC or at the state level, depending on their local presence. SEC Chair Gary Gensler highlighted the urgency of this revamp in a recent statement, noting that the exemption has allowed significant oversight lapses, including portfolio management deficiencies and misleading client communications.

“I believe an exemption written in 2002 allows gaps in 2024. In recent years, staff have observed compliance deficiencies by advisers relying on this exemption. In a 2021 risk alert, staff noted that nearly half of the examined advisers that claimed the exemption in fact were ineligible.” SEC Chair Gary Gensler

Key changes to internet-based investment advisory rules

Interactive website requirement

The cornerstone of the SEC’s updated rule is the mandate for investment advisers to operate a fully interactive, operational website. This site must serve as the primary platform for ongoing digital investment advice to multiple clients. The era of static brochures or limited online engagement as a qualification for federal registration is over. Advisers must now ensure their digital presence is both dynamic and comprehensive.

Elimination of the De Minimis exception

This exception previously permitted advisers to cater to a small number of “non-internet clients” without needing to adhere to the stricter federal registration requirements.

Form ADV revisions

A critical aspect of compliance under the new rule is the requirement for firms to update their Form ADV. This form must now explicitly reflect a firm’s eligibility for the internet adviser exemption, necessitating a careful review and specific representations directly on the form itself.

Compliance timeline: Preparing for change

The SEC has outlined a clear timeline for firms to align with these new requirements. The rule becomes effective 90 days after its publication in the Federal Register, with a subsequent grace period allowing existing advisers to adjust. By March 31, 2025, investment advisers must update their Form ADV to comply with the new regulations, coinciding with most advisers’ annual filing deadline. Furthermore, advisers who no longer meet the exemption criteria have until June 29, 2025, to register at the state level and withdraw their SEC registration.

Implications for firms and compliance professionals

The SEC’s shift towards more stringent regulation of online investment advisers underscores the importance of a proactive compliance strategy. Firms must now critically evaluate their digital advisory models to ensure they meet the new interactive website requirement. Additionally, a thorough revision of Form ADV filings will be essential to accurately represent compliance with the updated exemption criteria.

This regulatory update signifies the SEC’s commitment to adapting its oversight to the complexities of the digital financial landscape. For compliance professionals, staying abreast of these changes and guiding their firms through the transition is crucial. The enhanced investor protection measures, facilitated by a robust online advisory experience, promise to reshape the future of digital investment advice.

Stand on The Right, with its cutting-edge compliance software, is poised to assist firms in navigating these regulatory updates. It safeguards not only your firm’s integrity but also the trust and security of your clients in the digital age. Get in touch to request a demo.

Industry newsTAG: ,