Taking No Chances: Why an Engineer Registered as a Municipal Advisor
When is an engineer not an engineer?
According to the U.S. Securities Exchange and Commission, whenever an engineer advises a municipality on project funding related to bond sales and debt financing, rather than project design or construction, the engineer is not performing engineering services.
In that case, the SEC considers the engineering firm a municipal advisor and the firm is legally required to register with the Municipal Securities Rulemaking Board, set up by Congress in 1975 to promote fairness and prevent fraud.
The distinction between engineer and municipal advisor is needed because of new rules meant to protect cities and towns that carry stiff penalties for consultants.
To prevent engineers from being swept into the advisor category for all of the technical and construction consulting they provide, the SEC agreed to exempt much traditional engineering advice, including feasibility studies, project revenue projections and cash-flow modeling.
Despite the exemption from the rules, which took effect in July, gray areas in capital program finance advice remain a worry for engineers.
The “engineer exemption” is part of SEC rules written to enact the Dodd-Frank Act, adopted by Congress and signed by President Obama in 2010. The act was for the most part a response to the financial disaster or 2008 and the recession it triggered. The exemption was intended to allow engineers to do their work without having to register as municipal advisors.
Engineering groups contend that the regulations could result in legal, insurance, and ethical quandaries for firms working with municipalities. Although no engineering firms have run into trouble yet, several firms have already registered as municipal advisors and made changes to professional liability insurance policies to avoid running afoul of the rules, according to staff at engineering associations.
A Firm Decides to Register
One firm that decided it was prudent to register is consultant MSA Professional Services Inc.
MSA has 300 employees working in 15 offices in four states. It has numerous small towns and cities in Wisconsin, Minnesota, Illinois and Iowa as clients. Smaller towns and cities have less capacity to hire separate advisors or explore financing options on their own.
“We recognized that with the business model we subscribe to,” says Justin Sornsin, MSA’s municipal funding team leader. “It was pretty important for us to take the appropriate steps: to not only register as a municipal advisor, but also to put all the policies and procedures in place for us to achieve compliance.”
When the Dodd-Frank regulations caught MSA’s attention in 2011, says Sornsin, “at that time there were a lot of firms which were either ignoring the regulations or they assumed that the winds in Washington would change and it wasn’t something of broad concern.”
Now, more firms have gotten the message and are taking the regulations seriously. But Sornsin is concerned that there has not been enough outreach to municipal entities, especially small communities, about the new regulatory processes and how this will impact their relationships with engineering firms.
“Those who the regulations are supposed to protect are really going to be the last informed about the laws themselves,” he says.
Evolution of the Rules
The technical details and definitions in the SEC rule have evolved over time.
In September 2010, the SEC adopted a temporary rule requiring anyone who provides advice to municipalities about municipal securities to register with the SEC and the MSRB. The act intended for municipal advisor regulations to resolve observed problems with conflicts-of-interest and underqualified advisors.
The final rules intentionally do not include a blanket exclusion from the municipal advisor definition for engineers and engineering firms, but it does exclude “engineers providing engineering advice.”
However, the rules consider engineers to be acting outside of the scope of the exclusion if they provide advice to a municipal entity on municipal financial products or security issuance, the structure, timing, and terms of those issuances, revenue projections, debt service coverage calculations, and certain types of introductions to brokers, dealers, municipal advisors, and municipal securities dealers.
Experts knew of no engineering firms that have been caught acting as municipal advisors without registering yet.
The penalties can be severe: SEC court action, civil penalties, and statutory penalties up to $500,000 per occurrence for entities, as summarized in a report by Karen Erger, vice president and director of Practice Risk Management at the Lockton Companies, an insurance brokerage
