The change in the way lots sold to a third party guarantor get reported that Christie's announced yesterday was instigated by Sotheby's decision to begin offering third-party guarantors fees for providing the guarantees. Sotheby's was concerned that the exceedingly few cases each year where the guarantor decided to bid on the lot—and eventually won it—might not fully represent the price paid by the winning bidder.
Why? Well, in those very few cases, two transactions actually take place. The guarantor is paid a fee for the the financing. Then the buyer pays a premium. If the guarantor and the buyer are the same person, the total paid is a few low single digit percentage points lower than what would normally be reported. The two options for reporting are to leave the two transactions separate with the guarantee remaining private or to "net out" the two transactions in one public number.
This concerned Sotheby's enough to seek clarification from the New York State Department of Consumer Affairs which regulates the auction house. (Yes, you read that right. The auction house has a regulator.) Here's Bloomberg's Katya Kazakina:
Sotheby’s has been reporting prices net of fixed fees since May. The department’s clarification was in response to Sotheby’s letter seeking guidance on how prices should be reported, since there was a discrepancy among the auction houses. “It was important for the market that the reporting obligations of auction houses were clarified and universal,” said Lauren Gioia, a Sotheby’s spokeswoman. “We followed a helpful process offered by the DCA for businesses to obtain guidance on the interpretation of the regulations governing their industries. We are pleased that DCA found that Sotheby’s existing reporting practices were correct.”
All of this is fine. Sotheby's went to the regulator; got a ruling in its favor; now all of the auction houses will have to change the reporting on these very few lots that appear in the course of a year.
How did this issue get elevated to the level where Bloomberg could write a headline declaring Auction Houses Told to Improve Transparency in Reporting Prices? Does reducing the reported figure on a handful of lots really improve transparency?
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