01/17/2014

SEC strictly interpreting engineers' exemption from 'municipal advisor' registration rule

An engineer who counsels a public agency on options for financing utility system improvements may be required to register with the Securities and Exchange Commission as a "municipal advisor," SEC staff told ACEC representatives recently.

Pursuant to the Dodd-Frank Wall Street Reform & Consumer Protection Act passed by Congress in 2010, so-called "municipal advisors" are required to register with the SEC, and failure to do so carries significant penalties if a person or entity who acts as a municipal advisor fails to register.

The definition of a municipal advisor is one who, "Provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such financial products or issues...."

Final rules issued last fall by the SEC included a specific exemption for engineers (Rule 15Ba1-1(d)(2)(5) "to the extent that the engineer is providing engineering advice."

However, Katharine Mottley, national ACEC Director of Tax & Regulatory Affairs, reported recently that the SEC staff appears to be interpreting that exemption very strictly.

In an e-mail advisory, Mottley said that during a January 9 meeting with SEC staff, they "appeared to hope that engineers could focus their professional services on the technical aspects of a project," while refraining from providing public agencies with recommendations regarding project financing or rate-setting that could trigger the municipal advisory registration requirement.

During this meeting, SEC staff shared a 19-page document containing the agency's responses to frequently asked questions relating to the municipal advisor registration requirement.

While ACEC national staff will continue to communicate with the SEC on this issue, engineering companies that provide services to public agencies on water, wastewater or other utility projects should consult with legal counsel to determine whether they are subject to the municipal advisor registration requirement.

Failure to register as a municipal advisor carries penalties if the person engages in municipal advisory activities.  Registration involves applications, fees, disclosures and the application of standards and qualifications, including continuing education.

Perhaps more significantly, registered municipal advisors are subject to “conduct rules,” which are yet to be finalized, including significant limitations on political contributions, the violation of which can result in loss of compensation for business activities.