New York State Considers (Weakened) Auction Regulations
Assemblyman Richard Brodsky submitted New York's auction reform bill.
By Michael Stillman
A significant piece of legislation designed to regulate auctions is working its way through the New York State legislature. While what happens in one out of 50 states in one out of a couple of hundred countries in the world may not sound that important, New York is the auction capital of the United States if not the world. Changes in New York do matter.
The bill, sponsored by Westchester County (just north of New York City) Assemblyman Richard Brodsky, who has been sponsoring consumer-oriented legislation for two decades, is designed to make the auction process more transparent to bidders. While some parts of this bill may be a bit burdensome for auction houses, other parts should be beneficial to bidders. Though we don't know whether the auction houses agree with the provisions, one key area appears to have been sufficiently watered down to perhaps make it palatable to them.
Assemblyman Brodsky's bill, "An act to amend the general business law, in relation to auction requirements," was passed by the New York State Assembly on a vote of 142-1. It seems unlikely, considering the margin, that the New York State Senate would defeat it, the greater risk being it gets bottled up and dies in committee. This has happened before.
In a prior version, the most controversial section of this legislation was one designed to throw light on hidden reserves, and what some call "sham," "phantom," or "chandelier" bidding. This is a process where an auction house starts the bidding at a number below an unannounced reserve price (the reserve being the minimum price at which the auction house will sell the item). If a bidder makes an offer below the reserve, the auction house may then make a higher bid. It's referred to as a "sham" bid as the bidder (the house) has no intention of actually buying the object. The purpose is to drive the bids up to the reserve price or higher. If the bidder thinks he or she is bidding against another real buyer, or just gets caught up in the frenzy, he may place a higher bid than he would if he realized the competing bids were "shams."
The current bill provides several provisions to limit or throw light on this practice, but it does not prohibit it, and a strong transparency provision from the earlier version has been eliminated. Brodsky's legislation requires that auction houses disclose whether an item is subject to a reserve price, though the reserve price need not be disclosed. Once the reserve price has been met, an auctioneer may no longer bid on behalf of a consignor, nor may auctioneer or consignor bid on their own behalf without revealing their status. In other words, no undisclosed "sham" bids once the reserve has been reached. Meanwhile, the reserve price may not be any higher than the minimum estimated price (if there is one).
The piece that was removed from an earlier proposal was a requirement that so-called "sham" bids be identified by the auctioneer as being "for the consignor." This would have prevented undisclosed "sham" bids below the reserve as well as above it. Other bidders would know the price was being pushed up by the auction house, not another true bidder. Under the revised legislation, bids made by the auctioneer below the reserve would not be so identified. Buyers would know that this was a possibility by the announcement that items were subject to a reserve (provided they understood the implications), but would have no way of knowing, on any individual item, whether the bidding was real or "sham" since the "for the consignor" requirement was stripped from the bill.
When the original bill was filed several years ago, it included the following "justification" to require disclosure of all "sham" bidding: "Acceptance of a sham bid by an auctioneer on behalf of an auction house is essentially a deceptive practice. There is no justifiable reason to permit the taking of fake bids without disclosure of this practice to the public. The theatrical benefits created by this practice are far outweighed by the public's right to be informed of the acceptance of such bids during the auction process. This theatrical game playing is akin to pulling the wool over the consumer's eyes. Identification of the acceptance of such bids with the phrase 'for the consignor' would put an end to the chicanery being perpetrated by the auction houses." This wording is no longer mentioned in the current bill. By implication, the current bill continues to allow a certain amount of "chicanery."
New York State Considers (Weakened) Auction Regulations
When the earlier version was proposed in 2007, several auction houses voiced objections. Sotheby's warned that houses would move a substantial number of sales to London, and that bidders were aware of these practices anyway. However, if bidders were aware of these practices, we don't understand why this provision would be objectionable, as they rely on bidders' lack of understanding to be effective. If the auction houses would move a lot of sales from their natural location just to allow for "sham" bidding, the presumption is the practice must be very effective. That is unfortunate.
Basically, while "sham" bidding may be an old and venerable process, and many bidders may realize it is going on, its basic purpose is deception. Our own belief is that the previous requirement to notify bidders that a bid was "for the consignor" was better than no notification, and outright prohibition of the practice would be better still. Whatever the short term gains, buyers can become disenchanted with a process that employs deception, particularly if it leads them to overbid on an item. Venues that are perceived as being open and honest, as well as providing good value, are more likely, in our opinion, to prosper. We see the watering down of this provision as a squandered opportunity for auction houses to afford their customers greater confidence in the process while preventing wayward houses from gaining an unfair advantage, or hurting the reputation of auctions in general.
Most of the other provisions in Brodsky's earlier bill remain intact. One requires auction houses to disclose at the beginning of an auction whether some bidders have been offered loans. The idea here is that those with credit may push prices higher than they would without this benefit, though we imagine such a statement at the beginning of an auction will not have much more effect than fine print on a contract. Auctioneers are to be held responsible for the truth of statements in their catalogues, while consignors must warrant lawful title. Auctions must reimburse purchasers their bids if it turns out they have not received transferable title. Auctioneers must disclose whether they have a financial interest in an article. Prospective buyers must be allowed to inspect merchandise before sales, while auction houses must pay consignors within 14 days. That may prove a bit tight where there are a lot of consignors in an auction, but should help prevent a weak house from using the consignors' proceeds as a bridge loan to the next auction.
A copy of the summary and complete bill may be found on the New York Assembly website by clicking here now. It should be noted that this bill has passed the New York State Assembly before, only to die in the Senate, so there is no guarantee this one won't meet the same fate.