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  • 1. Protecting the Well-Informed Art and Collectibles World. Beyond Basics: Review and Analysis of Art Market Regulation, Art Finance, Collection Management and Online Art Trading Platforms Week 2: Art Market Regulation (Or Lack Thereof)… October 23, 2013 Judith L. Pearson, President ARIS Title Insurance Corporation New York + Denver, United States Session 1 October 16, 2013
  • 2. Protecting the Well-Informed Art and Collectibles World. Risk management for art assets Lawrence M. Shindell, J.D. Chairman ARIS Title Insurance Corporation April, 2012 Judith L. Pearson, President U.S.-New York Headquarters ARIS Title Insurance Corporation New York + Denver, United States
  • 3. Roadmap 1. Context of Global Art Market 2. 60,000-Foot View of “Regulation” Governing Art Industry 3. “Regulation” or Lack Thereof by Segment a) Museums b) Auction Houses c) Dealers and Galleries d) Art Funds 4. Projected Future Governance of Art Market ©2013 ARIS All rights reserved. 3
  • 4. The Treasure Assets: Art & Collectibles Barclays Wealth Insights: Profit or Pleasure? Exploring the Motivations Behind Treasure Trends. Volume 15, 2012, page 11 Original Source: Ledbury Research ©2013 ARIS All rights reserved. 4
  • 5. The Global Treasure Trove: How Big?  $50B to $1.25T annual art market globally; $60B public auctions only  Incalculable trillions in existing art and collectible assets worldwide  Estimated $41T in assets in U.S. alone will be passed down inter-generationally in the first half of the 21st century*  Projected $4-$6T of this transfer will represent art and collectibles  Estimated $960M to $2.25B invested in art and other alternative asset art funds worldwide * Sources: Center for Wealth and Philanthropy, Boston College; Rockefeller Philanthropy ©2013 ARIS All rights reserved. 5
  • 6. The Global Treasure Trove: Who Is Watching?  Every major bank in the world AN ASSET CLASS UNDERGOING A FUNDAMENTAL TRANSFORMATION  Every major property insurer in the world  Every major trust company, fiduciary in the world  Every major law firm, accounting/auditing firm in the world  Every art and alternative asset investment fund in the world  Every major D&O, E&O underwriter catering to the above in the world ©2013 ARIS All rights reserved. 6
  • 7. With All Efforts Geared Toward . . . Wealth Management Tax & Estate Strategies Philanthropy Asset Valuation Asset Risk Management Trusts & Foundations ©2013 ARIS All rights reserved. 7
  • 8. Published, The Art Newspaper, May 2011. Republished with express permission of artist. ©2013 ARIS All rights reserved. 8
  • 9. Maze of Laws in Art Transaction (U.S. References) ©2013 ARIS All rights reserved. 9
  • 10.  General legal principles – developed in case law, legislation, treaties, memoranda of understanding – apply to art transactions; can be unpredictable and produces ad hoc self-regulation  No federal, state, local, regional, international or otherwise comprehensive art market regulatory scheme; choice of law is often issue-determinative  Past market force to change status quo and to achieve market regulation  Enforcement of laws (e.g., criminal, import/export) subject to prosecutorial discretion; in U.S. subject to budget/efforts of ICE, FBI, District Attorney ©2013 ARIS All rights reserved. 10
  • 11.  Uniform Commercial Code (UCC): UCC-1 filings “perfect” security interests; UCC protects GFP in ordinary course (excludes sophisticated collectors and merchants); unperfected, consigned art absorbed into gallery inventory upon bankruptcy (artist consignment exception)  Personal Property Security Act (PPSA) Canadian equivalent to UCC; Register of Charges, U.K. equivalent  Uniform Standards of Professional Appraisal Practice (USPAP): Guidelines for valuing art for U.S. IRC tax purposes; de facto standard for valuing art in EU  International Valuation Standards (IVS), Royal Institution of Chartered Surveyors (RICS): U.K. equivalents to USPAP  UNESCO Convention on the Means of Prohibiting and Preventing Illicit Import, Export and Transfer of Ownership of Cultural Property 1970: Accepted/ratified by 124 countries; source countries still pursue recovery of objects outside their borders pre-1970 per national laws (i.e., Italy 1902; Turkey 1908) ©2013 ARIS All rights reserved. 11
  • 12.  Replevin Claim. In New York, “demand and refusal” rule applies to three year statute of limitations; after claimant meets threshold burden of proof finding of theft, possessor has burden or proof to show artwork NOT stolen; Bakalar v. Vavra  Various Claims. Art transactional claims styled as RICO; fraud; conspiracy; breach of express/Implied warranty; contract, fiduciary duty; negligence; negligent misrepresentation; unilateral or bilateral mistake; De Sole et al. v. Knoedler Gallery, LLC et. al ©2013 ARIS All rights reserved. 12
  • 13.  American Alliance of Museums (AAM), Association of Art Museum Directors (AAMD); International Council of Museums (ICOM); guidelines on museum acquisition/deaccession governance; focus WWII and antiquities  U.S. State Attorney Generals Charities Bureaus regulate nonprofits; focus unauthorized sales of restricted gifts  Museum trustees focus on their fiduciary duty; SarbanesOxley-like standards for nonprofits; fiduciary exception to attorney-client privilege, United States v. Jicarilla Apache Nation (2011) ©2013 ARIS All rights reserved. 13
  • 14.  City of New York Auctioneer Rules; require written consignment in which consignor warrants title and indemnifies auctioneer against title defect  Jenack v. Rabizadeh; raises question of whether auctioneer must disclose name of consignor to public/buyer to meet Statute of Frauds; issues on appeal  Auction houses GENERALLY – 1. Reserve right to rescind sale in future without time limitation if concerns about title/authenticity (prevents finality to transaction); effectively overrides-circumvents express/implied warranties 2. Offer third-party guarantee/irrevocable bid (denoted in catalogue); creates unfair advantages when guarantor bids on artwork guaranteeing ©2013 ARIS All rights reserved. 14
  • 15.  Art Dealers Association of America (ADAA): guidelines on code of ethics and professional practice  Pre-emptive rights in bills of sale; right-of-first refusal; right of first consignment; generally, enforced if in writing; Robin v. Zwirner; Kaikai Kiki v. Cerulean  Undisclosed dual/triple agency, Perlman v. Gagosian  IRC 1031 like-kind art exchanges with dealers acting as Qualified Intermediary, Holzer v. Stoyanov  New York City “truth in pricing” laws largely ignored; few galleries post prices; lax enforcement by consumer affairs officials ©2013 ARIS All rights reserved. 15
  • 16.  The Art Fund Association LLC is developing best practices guidelines for art fund industry  Conflicts of interest between fund management/founders and true third-party investors; hard to show arms-length, unbiased transactions (non-insider trading), integrity of financials  Qualified Audit Reports due to unresolved issues (title, value)  Directors & Officers, Errors & Omissions liability for failure to manage art assets properly including inadequate disclosure of market risk factors  Canadian, publicly-traded Sino-Forest Fund: $600M collapse/de-listing, 80% value drop because of defective title to forestry assets, $35M internal investigation (2011) ©2013 ARIS All rights reserved. 16
  • 17.  “The growth of the art market and its infrastructure in the last 10 years is fuelling an increasing interest in art as an asset class, which means we now can start talking about the early stages of an Art and Finance industry. . . . The art market is going through a ‘major transformation’.”*  Art lending is being curtailed because of “valuation and difficulties in assessing the downside risks;” institutional investors are “hesitating “*due to] lack of liquidity and valuation issues.”  Fundamental challenge: “*the+ unregulated nature of the art and collectibles market.”* * Source: Deloitte Global “Art and Finance Group,” Luxembourg, December 2011 Self-discipline in self-regulation key; transactional standards will support transparency in and global transformation of art market ©2013 ARIS All rights reserved. 17
  • 18.  Proposed art Transactional Standards – 1. 2. 3. 4. 5. 6. Close art transactions in escrow Seek disclosure of multi-agency representation Conduct deep due diligence Cure defects before sale Rely on independent QIs for 1031 exchanges (not dealers) Require title insurance to mitigate risk and enhance value  Preserve confidentiality tradition; disclose stakeholder identities only to neutral, third-party (title insurer)  Safeguard art scholarship opinions (experts and artist foundations fearful of litigation); proposed New York law seeks to protect authenticators against lawsuits ©2013 ARIS All rights reserved. 18
  • 19.  Eliminates Legal and financial liability as seller/consignor  Eliminates Key market D&O and E&O liabilities  Creates Permanency of the transaction for buyer and seller  Allows Normal, desired, imperfect sales/consignments  Leads To higher sales prices and asset valuations  Solidifies Appraisals, charitable contributions, estate strategies  Reduces Acquisition due diligence costs  Helps Authenticity, P/C coverage, international shipment (passport) ©2013 ARIS All rights reserved. 19
  • 20. Protecting the Well-Informed Art and Collectibles World. Clear legal ownership is the keystone for moving Risk management for art from a passion purchase to an asset class. Thank you for joining us today. April, 2012 Judith L. Pearson, President Questions. ARIS Title Insurance Corporation New York + Denver, United States art assets