Skate online presentation_lawrence

Judith L. Pearson, President

ARIS Title Insurance CorporationNew York + Denver, United States

Protecting the Well-Informed Art and Collectibles World.

Session 1October 16, 2013

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



Risk management for art assets

April, 2012


Lawrence M. Shindell, J.D.

ChairmanARIS Title Insurance CorporationU.S.-New York Headquarters

Roadmap

©2013 ARIS All rights reserved.

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1. Context of Global Art Market

2. 60,000-Foot View of “Regulation” Governing Art Industry

3. “Regulation” or Lack Thereof by Segmenta) Museumsb) Auction Housesc) Dealers and Galleriesd) Art Funds

4. Projected Future Governance of Art Market

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

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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

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The Global Treasure Trove: Who Is Watching?


Every major bank in the world

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

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AN ASSET CLASS UNDERGOING A FUNDAMENTAL

TRANSFORMATION

With All Efforts Geared Toward . . .

Philanthropy

Trusts &Foundations

AssetValuation

Tax & EstateStrategies

WealthManagement

Asset RiskManagement


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Published, The Art Newspaper, May 2011. Republished with express permission of artist.


The Historical Perspective and Vestige

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Maze of Laws in Art Transaction (U.S. References)


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Chaotic Legal Paradigm for Art Transactions

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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 tobudget/efforts of ICE, FBI, District Attorney


Example Legislation, Standards, Conventions

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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)


Example U.S. Case Precedent

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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


Museum: “Regulation”

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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; Sarbanes-Oxley-like standards for nonprofits; fiduciary exception to attorney-client privilege, United States v. Jicarilla Apache Nation (2011)


Auction House: “Regulation”

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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


Dealer and Gallery: “Regulation”

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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


Art Fund: “Regulation”

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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)


The Future: Trends for Art Asset Integrity

“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

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The Future: Regulation for the Art Market?

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Proposed art Transactional Standards –1. Close art transactions in escrow 2. Seek disclosure of multi-agency representation3. Conduct deep due diligence4. Cure defects before sale5. Rely on independent QIs for 1031 exchanges (not dealers)6. 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


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)

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Ubiquitous Value Proposition of Title Insurance



Risk management for art assets

April, 2012


Clear legal ownership is the keystone for movingart from a passion purchase to an asset class.

Thank you for joining us today.

Questions.

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