The Securities and Exchange Commission said on Wednesday that it was amending a rule governing when RIA firms can register with the Securities and Exchange Commission if they are robo-advisors or use robo-advisory services. The patchwork of state and federal oversight of firms and the growth of smaller RIAs using digital services has created gaps in compliance, according to the SEC’s chairman, Gary Gensler, and required the agency to be more specific about which firms can register with the agency.

In the past, the SEC delegated oversight of smaller firms to the states if they didn’t meet certain thresholds for assets under management, but that put some digital advisories in limbo if they were small but had national footprints and were better served by SEC registration. Under a 2002 rule, they were allowed to register with the SEC under an exemption for internet advisors. But that’s been complicated by the fact that some firms are serving clientele both online and off. There’s worry the internet presences might be a front for firms that otherwise wouldn’t really satisfy SEC requirements.

Up until now, the rule has been that an internet firm can serve a few clients in person—up to 15 non-internet clients, according to Gail Bernstein, general counsel of the Investment Adviser Association. But no more.

“In recent years, staff have observed compliance deficiencies by advisors relying on this exemption,” Gensler said Wednesday. For instance, nearly half of the RIAs that SEC staff examined in a 2021 sweep were ineligible to use the exemption and all received a deficiency letter citing problems with portfolio management, best interest compliance, misleading statements and inadequate disclosure.

To address the current gaps in the rule, the new amendments will modernize the internet exemption by requiring that advisors that use it offer their digital investment advisory services through an operational, interactive website. The website must be offered on an ongoing basis to more than one client, Gensler noted.

“That means firms that rely on the exemption—thus being regulated by the SEC rather than state securities regulators—actually will need to advise clients through the internet and do so from the moment the firms rely on this exemption. 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.

Second, the amendments require advisors who seek to rely on the exemption to provide advice to clients “exclusively through this operational, interactive website,” according to the SEC.

That ends allowances under the previous rules that let advisors “qualify as internet advisors while, for instance, also serving a small number of investors in person, over the phone, or by other means.”

Gensler said the changes “better reflect what it means in 2024 truly to provide an exclusively internet-based service.”

Only about 250 RIAs currently rely on the exemption and even fewer are likely to rely on it as amended, Bernstein said. Most RIAs offering robo-advice digital services such as Fidelity and Vanguard are already fully registered RIAs with the SEC.