SEC tightens rules on robo-advisor registration

investmentnews.com:

The Securities and Exchange Commission is closing a loophole that let some advisors register with the federal regulator as RINOs – robo-advisors in name only – by amending an old rule.

The SEC updated its registration requirements for internet-based investment advisers, aiming to fill decades-old gaps in the regulatory framework and enhance investor protection in the digital world.

The revamp, handed down Wednesday, aim to fill gaps that have emerged from a decades-old rule, the Internet Advisers Exemption, which governed whether online investment advisers should register with the federal watchdog or the state they have a local presence in.

“I believe an exemption written in 2002 allows gaps in 2024,” SEC Chair Gary Gensler said in a statement. “In recent years, staff have observed compliance deficiencies by advisers relying on this exemption.”

According to Gensler, the SEC found a significant proportion of advisers using the internet exemption were in fact ineligible, with deficiencies ranging from portfolio management issues to misleading statements.

Under the revised rules, online investment advisers must maintain a fully operational and interactive website for delivering ongoing digital advisory services to multiple clients in order to register with the SEC.

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

The amendments also require that advisors must provide advice to clients exclusively through that working website if they want to qualify for the Internet Advisers Exemption. Previously, advisors had wiggle room to qualify as robo-advisors even if their book included a small number of investors they serviced by phone, in