New York City Eliminates the Rules That Govern Art and Other Auctions

New York City has eliminated the regulations it had tailored to govern the auction industry, an abrupt reversal in policy that is part of a sweeping effort to improve conditions for businesses after the economic damage brought on by the coronavirus pandemic.

Conceived to help small businesses by cutting red tape and reducing penalties, the changes will also have the effect of easing restrictions on major companies like Sotheby’s and Christie’s, which sell billions of dollars of art and other items each year.

The regulations had been enacted over decades to increase oversight of an art industry long viewed as opaque — with buyers and sellers often shielded from public view — and chiefly required that certain information was disclosed, such as whether an auction house had a financial stake in a work up for sale.

Representatives of several auction houses said they had been surprised by the wholesale elimination of the rules and had only learned in recent days of the changes, which were authorized by City Council legislation last year.

As set by the new law, auctioneers will no longer need to be licensed as of June 15. The industry-specific regulations, installed in response to several scandals and the explosive growth of the art industry, have already sunsetted.

City officials defended the elimination of the rules as useful streamlining that will work to improve New York’s business climate. But some art market experts said they were concerned that the city had gone too far.

“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,” said Thomas C. Danziger, an art market lawyer who advises collectors on consignments to auctions.

“With no regulations, there are no more rules of the road,” he added.

The repeal of the regulations was part of a larger package that also eased restrictions on a host of other industries, including laundries, sidewalk cafes and amusement arcades. It came as other government entities have been studying whether the U.S. art market requires further regulation to increase its transparency and to combat money laundering. In February, the U.S. Treasury Department released a report that said that while the market can be vulnerable to money laundering, there was no need for immediate action.

The city’s regulations governed a different aspect of the art market, namely the protections afforded to consumers who bid at auction for paintings and other works of art. Some of the rules were designed specifically for the art market, to ensure that bidders were given the information they needed to make knowledgeable choices. So, for example, auction houses were required to announce when they had a financial stake in an item being sold.

But auctioneers of other products were also governed by regulations that are being eliminated under the repeal.

The sweeping approach to help businesses, enacted under legislation known as Local Law 80, was adopted last July in the waning months of the de Blasio administration. City officials said that in recent years there had been few consumer complaints about auctions and that they believed the industry could be effectively policed by more general consumer protection laws.

A council spokesperson said in a statement, “As part of a larger business relief bill that also included decreased fines and opportunities to cure for numerous offenses, the Council considered feedback from the administration on outdated provisions and unnecessary licensing schemes.”

The statement continued, “The Department of Consumer and Worker Protection (DCWP) recommended removing the auctioneer license requirement based on the minimal number of complaints related to this industry and the fact that most grievances by consumers in relation to deceptive sales practices and misleading advertising could be addressed by the City’s Consumer Protection Law.”

Some art market experts said that the state’s Uniform Commercial Code and other general business laws would continue to offer protections, but also said that these did not specifically define the prohibited conduct and necessary information disclosure at auctions as the city regulations did.

Several companies, including Christie’s, Sotheby’s and Phillips auction houses, said they had not lobbied for the changes in the regulations, which they must confront as they approach their major May sales. On any given night, the major houses can sell hundreds of millions of dollars of art under bidding procedures long crafted to abide by the city’s regulations.

Christie’s and Phillips said, for the time being at least, they intended to proceed as if the regulations were still in place.

“Notwithstanding the repeal of the auction regulations, Phillips remains committed to conducting its auctions fairly, transparently, and in the best interest of our clients,” it said in a statement.

Sotheby’s declined to comment on whether it would continue to operate under the former rules.

One part of the former regulations was designed to police a longstanding practice called “chandelier bidding,” under which auctioneers announce a series of fictitious bids on a work to help build momentum in the crowd.

Though chandelier bidding was allowed by the city, the regulations forbid auctioneers from announcing any additional fictitious bids after reaching the so-called “reserve price,” the minimum price at which a consignor of a work had agreed to sell it. The regulation was intended to prevent auctioneers, who earn a percentage of a final sales price, from continuing to invent bids to falsely boost the price.

Another regulation, designed to promote transparency, said that in creating their sales catalog, auctioneers could not publish an estimated value for a work that was below the reserve price already set by the consignor. To do so would be a misrepresentation since the consignor and the auction house had already decided that a work would not sell for so little.

Auction house leaders have long argued that, as reasonable as the regulations might have sounded, they ignored the fact that most buyers at auctions were wealthy collectors who were quite well-informed about the nuances of the market.

But a former state legislator, Daniel Squadron, who had sought to strengthen art market regulations in Albany, said that such restrictions were useful. “The path forward for New York auction houses isn’t to turn them into the wild west,” he said. “It’s the same it’s been for a decade — to expand the protections that have made the city a great market.”

A major collector, Alberto Mugrabi, also said he was concerned about the effects of the changes.

“If the auction houses were not to disclose those things it would not be good for them,” he said. “Today you want to give people as much information as you can, so they can make their own decisions.”

Jo Backer Laird, an art lawyer at Patterson Belknap Webb & Tyler, and a former Christie’s general counsel, said she agreed that the repeal of the regulations could dent consumer confidence.

“Without the regulations, I think that’s a blow to the auction houses,” she said. “They may in the immediate aftermath think this gives them more freedom, but ultimately it leads to an erosion of trust which is why the regulations were there. If you don’t trust, then you don’t consign or buy there.” She said that she wondered whether the deregulation of the large auction houses had not been sufficiently thought through.

“If that’s the case, it will be reversed,” she said.