Better Markets filed a comment letter with the Securities and Exchange Commission in response to the SEC’s proposal to amend a rule that allows investment advisers operating through the internet to register with the SEC. The proposal would require that internet investment advisers seeking to register with the SEC must provide investment advice exclusively through an operational interactive website on an ongoing basis to more than one client.
Why It Matters. The federal securities laws generally prohibit investment advisers with less than $100 million in assets under management from registering with the Commission. The idea is to reserve Commission registration for investment advisers with a national presence, as opposed to advisers that are essentially local businesses that can be regulated by the states. Nonetheless, the Commission may exempt certain advisers that manage less than $100 million in assets from the prohibition on Commission registration. In 2002, the Commission adopted the “Internet Adviser Exemption” to allow investment advisers to register with the Commission if they provided investment advice exclusively through an interactive website, except that they could provide investment advice to fewer than 15 clients through other means during the preceding 12 months. The Commission’s intent was to permit Commission registration for these “internet investment advisers” who did not reach the threshold of assets under management to register with the Commission but who, unlike state-registered advisers, had no local presence and whose advisory activities through its interactive website were not limited to one or a few states.
Since the Commission adopted the Internet Adviser Exemption in 2002, investment advisers have increased their use of technology to provide investment advice. As a result, investment advisers have been relying on the Internet Adviser Exemption to register with the Commission despite not providing advice to clients through an interactive website or despite providing advice through an interactive website while maintaining a substantial local presence. That undermines the Commission’s ability to use its scarce resources in a manner that best protects the public.
What We Said. We support the SEC’s proposal to amend the Internet Adviser Exemption in an attempt to ensure that only advisers with a national presence may register with the Commission. Investment advisers that purport to operate exclusively through the internet but that have no clients do not have a national presence. These advisers are more akin to local businesses that can be effectively regulated by state securities authorities. Similarly, investment advisers that communicate their investment advice to clients through interpersonal interactions should not be eligible for the Internet Adviser Exemption. Such advisers have a local presence with respect to their clients and accordingly should be regulated by the states, unless another basis for registration with the Commission would make those advisers eligible for such registration.
Nonetheless, the proposed rule does not go far enough. It provides that an investment adviser may register with the Commission so long as its operational interactive website provides investment advice on an ongoing basis to more than one client. This means that advisers could rely on the exemption so long as they provide investment advice exclusively through their operational interactive website to only two clients. Such a modest numeric requirement will not serve as a reliable indicator that the adviser has a national presence. A requirement that the adviser provide advice through its website to at least 15 clients would come closer to ensuring that the adviser has a national presence and therefore should be regulated by the Commission.
Bottom Line. Better Markets supports the SEC’s efforts to better protect investors by ensuring that it devotes its scarce resources to regulating investment advisers with a national presence.