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?
It’s really not that simple, unfortunately. Here’s why. The issue has been blown out of proportion by the trade. Kazakina has this symptomatic quote:
“It levels the playing field,” said Mary Hoeveler, an art adviser in New York. “It’s important that the selling prices are not distorted by backroom transactions that are not made public. It’s not accurate representation of the actual price.”
The problem with this point of view is that the change in reporting does nothing to address the “backroom transactions.” The DCA’s opinion is good because it imposes uniformity on the reporting. But the new rules don’t eliminate distortion at all. When those very, very few third party guarantors buy the lots they have guaranteed, the price will now reflect what the buyer paid net of both transactions.
To everyone else, the new number will leave the false impression that they could have paid the same figure to own the work had they bid to the same level. They could not. Although an auction is public and open to anyone who registers with the auction house (and meets their requirements,) the opportunity to provide a third-party guarantee is not open to any potential buyer.
In trying to reflect the “true” price, the reporting will not only show a price available to very few. There won’t be a level playing field at all. Still, the distortion will only be a few percentage points. And it will only be the rare lot.