"The case reveals the casual approach to the legal concept of agency"

Buyers and sellers of art in the private market (and to a lesser extent at auction) often overlook the fundamental question of "who acts for who," otherwise known as the legal concept of agency.

The distinction is crucial because an agent is a "fiduciary" of its principal and as such the highest standards at law are imposed on him. An agent owes his principal strict "fiduciary duties" including the duty of loyalty which entails not only acting in good faith in the best interests of the principal but also the duty to avoid conflicts of interest (the art world being a breeding ground for conflicts). Similarly, only an agent acting on behalf of its principal has the authority to sell an artwork and the legal title to pass ownership to the buyer (although where authority is lacking, a principal can ratify the conduct retroactively).

An article in The Art Newspaper does well in bringing attention to this subject because clearly one's legal rights and protections w/r/t a transaction for the sale or purchase of art are integrally bound-up with the principles of agency. The private market is characterized by the lack of disclosure and the prevalence of undocumented transactions where parties are often unaware of who owes them what duties. At auction this is less of a problem as there is far greater transparency and the terms and conditions of sale published by the major auction houses unequivocally state that the auction house is an agent for the consignor (i.e. seller) of the art (see Sotheby's "Terms of Use"). Furthermore, the law itself imposes fiduciary duties on auction houses whereas it generally does not on dealers which means the parties themselves must create agency relationships, preferably in writing. The article points out some of the art world conventions that do genuinely represent an obstacle to achieving increased transparency and documenting transactions but my mantra remains unchanged: disclosure and contract are indispensable to protect your legal rights when buying and selling art (though to be clear, a contract, oral or written, is not required to form an agency relationship).

Is the Russian initiative to regulate art securitization and art funds merely a ploy to make them seem investment grade?

That was the suggestion made by Artworld Salon as it commented on Russia's newly-implemented art funds regulation introduced last month as part of a modernization program designed to make Russia an international financial center rivaling New York, London and Hong Kong. The allegation that the regulation is merely form over substance is not unfounded given "the relative lack of oversight of the opaque and enthusiastically “managed” system that is the Art Market." Indeed, regulating art securitization and art funds appears to be at odds with a distinctly investor-unfriendly market characterized by "private dealing, auction pumping, the ability to cellar works that aren't selling and [the] lack of any form of reliable pricing register." Surely transparency must precede oversight. The bases for the suspicions gain even greater strength when one learns that the implementation of the regulation was in sync with the creation of two closed end art funds by Leader, "a powerful local asset management firm controlled by Putin loyalists." It's more likely than not then that the regulation is above all a marketing tool.

The author also takes this opportunity to discuss one of the most significant problems afflicting the global art market and its component individual markets: the difficulties associated with pricing acquisitions and disposals of art due to the lack of publicly available information on transaction prices. I have previously discussed the need for increased disclosure in the context of droit de suite and how its introduction in New York would be a highly undesirable way to achieve greater market transparency. In my view, the proposal of "a price register for each and every work of art that someone tries to promote as “investment grade,” with NO exceptions and NO omissions" is far more compelling than Edward Winkleman's case in favor of droit de suite, which suffers from the serious risk of shrinking the New York market ultimately to the detriment of all artists.

NOTE: "with an exception of perhaps only India, no country of any significant domestic investment market has a well defined regulatory framework for art funds," reported Skate's. "We are not aware of any regulatory framework anywhere in the world defining how art assets can be put into mutual funds and such funds can be offered to [the] general public [and/or] qualified investors."