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Firms that offer robo advice must fully commit to being robos under reforms being adopted by the U.S. Securities and Exchange Commission (SEC), which will tighten the requirements around its exemption for internet advisers.

The SEC approved rule changes that aim to modernize how online advisers have to register.

Historically, smaller advisers had to register with state securities regulators while larger firms could register with the SEC. However, an exemption adopted in 2002 allowed firms that operated primarily online to register with the SEC.

Recently, the SEC noted that firms are abusing that exemption, with numerous firms relying on the exemption when they weren’t eligible to do so.

In a risk alert, the SEC reported that its reviews of these advisors not only found weaknesses in their compliance policies and procedures but also discovered shortcomings in their portfolio management practices, such as failing to meet their fiduciary obligation to provide advice that is in clients’ best interests. They also found violations involving marketing and advertising, including misleading statements and poor disclosure.

In response, the SEC is now revising its rules to require that firms relying on the exemption have an operational, interactive website that provides digital investment advisory services on an ongoing basis. They must also exclusively provide advice to clients through the website (they can’t also serve certain clients over the phone).

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

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

The new requirements will take effect in 90 days. Firms relying on the exemption will have to comply with the rule by March 31, 2025.