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Unexpected Deregulation: New York City Shakes Up Art Market by Repealing Long-Standing Auction Industry Regulations

April 11, 2024

print depicting an auction

By Rachel Sundar

New York City, a global hub for the art market, hosts numerous auction houses with international footprints. In a surprising move that sent shockwaves through the art world, the New York City Council repealed long-standing regulations governing the city’s auction industry, effective April 2022.[1] This deregulation was part of a broader effort to stimulate business activity post-pandemic, primarily involving eliminating rules that had been enacted in the 1980s to bolster oversight within an industry known for its opacity.[2]

Legislators intended the original regulations, encompassed in Subchapter 13 of chapter 2 of title 20 of the Administrative Code of the City of New York (sections 20-278 to 20-290) and Subchapter M of chapter 2 of title 6 of the Rules of the City of New York (sections 2-120 to 2-125), safeguard buyers’ interests by ensuring disclosure of crucial information, particularly in cases where auction houses held a financial interest in the items being sold.[3] Due to the nature of the art market, the regulations were narrowly tailored to govern auctions involving art and collectibles.[4]

Despite having been approved by the City Council in July 2021, the repeal received limited attention from the press until it was passed and was thus met with surprise from representatives of various auction houses as well as many actors within the broader art community.[5] A spokesperson for Christie’s stated on May 3, 2022, that they did not advocate for deregulation and would continue to operate as they had been.[6] This statement underscores the broader auction community’s general commitment to established standards, suggesting that the repeal may have caught actors within the auction industry and the general art market off guard. This raises the question: if the repeal of these municipal laws in New York City was un-lobbied, what or who prompted the city to amend them?

A closer look at the repealed regulations

The now-repealed regulations were first enacted four decades ago, establishing a robust framework to safeguard the interests of consumers and foster transparency in a loosely regulated industry. These regulations mandated that, in order to participate in the auctioneering business, auction houses were required to obtain a licence and exclusively employ licensed auctioneers.[7] They also stipulated that auction houses shall retain auction records for a minimum of six years, ensuring accountability and providing a means of addressing questions related to attribution and title.[8] Additionally, written consignment agreements became obligatory, disclosing all associated fees and affirming the consignor’s title warranty to the ultimate purchaser.[9] These measures also aimed to safeguard clients and guarantee the disclosure of crucial information before a sale, including any financial arrangements between the auction house and consignor, such as loan advances or guarantees.[10] The regulations also addressed the issue of reserve prices—a pre-set minimum below which a lot would not be sold.[11] The regulations required auctioneers not to publish estimated values below the reserve price.[12] While the public was not privy to the exact reserve price, it was entitled to know that the consignor had set a reserve .[13] Moreover, a significant provision stipulated that the reserve price could not surpass the low estimate provided for the work.[14] Finally, one of the key focuses of the regulations was the oversight of the so-called “chandelier bidding”—a practice whereby auctioneers playacted bids as a warm up to generate interest.[15] The rules limited chandelier bids to the reserve price, preventing auctioneers from announcing fictitious bids above this point.[16] This regulation aimed to curb the incentive for auctioneers, who earn a percentage of the final sales price, to continue inflating prices through artificial bids. These regulations were implemented as a direct response to concerns about transparency, conflicts of interest, and potential misconduct within the art auction industry.[17]

Although only binding on auction houses in NYC, the regulations substantially impacted the auction industry at large. Over the last few decades, most major global auction houses, acting not only in NYC, have adopted these rules as standardised practice.[18] Despite the normalisation of such rules, concerns about the transparency of the auction industry persist, especially as the art market continues to grow and issues such as money laundering become increasingly pronounced. It is therefore all the more puzzling what prompted legislators in New York to repeal these regulations. The decision has raised many questions about the potential consequences for transparency and accountability within the auction market.

So why deregulate?

Amidst these concerns, New York City Council Members have defended the recent deregulatory move by pointing to the scarcity of consumer complaints in recent years, suggesting that broader consumer protection laws could adequately regulate the auction industry.[19] This apparent lack of claims seems to have fostered a belief that the auction sector could thrive under a more generalised regulatory framework. The repeal, primarily governed by Local Law 80, was part of a comprehensive legislative package aimed at reducing bureaucratic hurdles for various industries, including laundromats, sidewalk cafes, and amusement arcades.[20] While it is unclear why auction houses were placed in the same category as such small businesses, the overarching goal seemed to be to streamline administrative, regulatory and operational processes and contribute to an improved business climate in a post-COVID-19 New York. However, some experts in the art market continue to express concern, suggesting that the city may have gone too far in dismantling regulations.[21]

Regardless of the intention behind it, this move marks a significant shift in the regulatory landscape governing the auction industry. Several key elements of past regulations were dismantled, allowing auctioneers to operate with far less legal oversight. Under the relaxed regulations, auctioneers no longer need to be licensed,[22] disclose whether lots are reserved[23], when a third party holds a financial interest in a lot, including instances of irrevocable bids or financial guarantees,[24] nor even reveal if the auction house itself has a financial stake[25] – all crucial elements in fostering confidence among buyers and sellers. Moreover, auction houses now enjoy increased flexibility in establishing estimates.[26] Unlike the previous restriction preventing the reserve from exceeding the low estimate, the new rules afford greater freedom to align with market conditions.[27] Finally, the regulations surrounding chandelier bidding have become considerably more lenient.[28]

Divergent views

Despite reassurances by several major auction houses, including Christie’s and Phillips, that their practices will remain unchanged, concerns have been raised by industry experts.[29] In an interview with the New York Times, Thomas C. Danziger, a prominent art lawyer, emphasised the pivotal role of regulations in maintaining confidence in the auction market.[30] According to Danziger, “the regulations which were in place ensured that there was a level playing field in the auction room, and that all participants played by the same rules.”[31] In other words, the efficacy of the auction industry is intrinsically tied to the trust placed in it by consumers. As such, the absence of regulations poses a potential threat to undermining this trust. Certain experts argue that while existing laws, such as New York’s Uniform Commercial Code and the New York Arts and Cultural Affairs Law, may provide some level of protection, their broad scope may not be sufficient to address the unique dynamics of the auction industry.[32]

Nevertheless, despite numerous arguments advocating for increased transparency in the art market and auction industry, an equal number of voices contend that more regulatory intervention is unnecessary. This perspective is shared by Jane A. Levine, former Senior Vice President and Compliance Director for Sotheby’s. According to Levine, “people like to say that the art market is unregulated. Nothing could be further from the truth. There are bespoke auction rules that cover this very tiny market that actually do govern the auction process.”[33]

Conclusion

While the repeal has surprised many due to its unforeseen nature, it seems unlikely to result in as much change as some may have feared. Disclosures, which improve transparency, consistency, and equal access to information, as well as upholding ethical standards, contribute to client confidence and serve the interests of both auction houses and their clientele. Due to the pervasive lack of transparency in the art market, discerning any changes will always remain challenging. Nevertheless, given the significant financial stakes involved in these auctions, clients are unlikely to persist in participating if they perceive any form of exploitation or mistreatment. Consequently, one could contend that even in the absence of specific regulations, the industry is incentivized to uphold these practices for the preservation of the auction process’s integrity. Furthermore, the deregulation might even present an opportunity for auction houses to demonstrate their dedication to ethical standards and to their clients. This could potentially distinguish them from other players in the industry that may choose to embrace the new freedoms.

Additional Readings:

About the author:

Rachel Sundar, a postgraduate fellow at the Center for Art Law, recently graduated from Sciences Po Paris Law School, where she majored in Economic Law, specialising in Innovation Law. Her primary interest lies in exploring the effects of digital creation and artificial intelligence on the art world, with a particular focus on issues of authorship and copyright protection.

Select Sources:

  1. Graham Bowley and Robin Pogrebin, New York City Eliminates the Rules That Govern Art and Other Auctions, N.Y. Times (May 3, 2022). ↑
  2. Ibid. ↑
  3. Marx, Lina, Joseph A. Patella, and Rachel E. Hudgins, New York City Lifts Rules Governing Auctions, The National Law Review (June 8, 2022). ↑
  4. Eileen Kinsella, In a Surprise Move, New York City Has Eliminated Longstanding Regulations Designed to Boost Transparency in the Auction Industry, Artnet News (May 4, 2022). ↑
  5. Ibid. ↑
  6. Ibid. ↑
  7. The City Record, Official Journal of the City of New York, CXLVI, no. 158 (Aug. 15, 2019). ↑
  8. Carolina Herrera, NYC Auction Houses – One Year after Deregulation, The Columbia Journal of Law & the Arts (Nov. 15, 2023). ↑
  9. Ibid. ↑
  10. Ibid. ↑
  11. Eileen Kinsella, In a Surprise Move, New York City Has Eliminated Long Standing Regulations Designed to Boost Transparency in the Auction Industry, Artnet News (May 4, 2022). ↑
  12. Ibid. ↑
  13. Ibid. ↑
  14. Ibid. ↑
  15. Steve Schindler and Katie Wilson-Milne, Surprise! NYC Repeals Auction Regulations, The Art Law Podcast (May 10, 2022). ↑
  16. Ibid. ↑
  17. Ibid. ↑
  18. Eileen Kinsella, In a Surprise Move, New York City Has Eliminated Long Standing Regulations Designed to Boost Transparency in the Auction Industry, Artnet News (May 4, 2022). ↑
  19. Graham Bowley and Robin Pogrebin, New York City Eliminates the Rules That Govern Art and Other Auctions, N.Y. Times (May 3, 2022). ↑
  20. Ibid. ↑
  21. Graham Bowley and Robin Pogrebin, New York City Eliminates the Rules That Govern Art and Other Auctions, N.Y. Times (May 3, 2022). ↑
  22. Ibid. ↑
  23. Steve Schindler and Katie Wilson-Milne, Surprise! NYC Repeals Auction Regulations, The Art Law Podcast (May 10, 2022). ↑
  24. Eileen Kinsella, In a Surprise Move, New York City Has Eliminated Long Standing Regulations Designed to Boost Transparency in the Auction Industry, Artnet News (May 4, 2022). ↑
  25. Ibid. ↑
  26. Ibid. ↑
  27. Ibid. ↑
  28. Steve Schindler and Katie Wilson-Milne, Surprise! NYC Repeals Auction Regulations, The Art Law Podcast (May 10, 2022). ↑
  29. Graham Bowley & Robin Pogrebin, New York City Eliminates the Rules That Govern Art and Other Auctions, N.Y. Times (May 3, 2022). ↑
  30. Ibid. ↑
  31. Ibid. ↑
  32. Ibid. ↑
  33. Robin Pogrebin and Kevin Flynn, As Art Values Rise, so Do Concerns about Market’s Oversight, N.Y. Times ( Jan. 28, 2013). ↑

 

Disclaimer: This article is for educational purposes only and is not meant to provide legal advice. Readers should not construe or rely on any comment or statement in this article as legal advice. For legal advice, readers should seek a consultation with an attorney.

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