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REGULATION A Necessity For
U.S. Rare Coin Market 

(November, 2000)

 

Having spent over 25 years in the highly regulated world of financial assets, as a registered investment advisor I am finding that business practices in the numismatic arena leave much to be desired.  Criticizing marketplace conditions is not just "complaining to complain", since $3,500 and up transactions grant all participants definite rights of discourse, if not recourse.  The concept of prior and full disclosure seems foreign to this industry, as many coin dealers withhold information about the net quality and relative pricing of a particular coin in order to affect a sale or a purchase.  It is strictly up to the customer, under the age-old tenet of caveat emptor, to acquire an advanced numismatic knowledge level that is comparable to or superior to the coin broker or dealer with which he or she is dealing.  Alternatively, the novice or intermediate level collector must rely primarily on the fact that past business transactions have appeared to be fair and beneficial with a particular party or the business reputation appears spotless.  Granted, there are many instances were it is a combination of these elements of both expertise and trust that prevails, but this industry poses way too many pitfalls for the novice collector in relation to the not inconsequential monies and time-to-transact often involved.  Certain rules of the road, imposed by an impartial, attentive, and reasonably funded third-party governmental agency, are required to level the playing field between those in the know and those who want to participate at the customer, collector, and investor levels.  As a laissez faire kind of guy, I cringe at the mention of government regulation, but this is one Wild West show that needs a master of ceremonies.

At a minimum, here are some of the mandated changes in industry practices I would recommend:

 

1.)   Complete and standardized written descriptions of all rare coins for sale over $5,000 to be contained on the customer's invoice that address most visible/noteworthy marks and/or discolorations, presence or absence of original toning or patina, degree of fullness of strike with respect to specific series, date, and mintmark, state of original luster, etc.  At a minimum cover the traditional elements of eye appeal, although highly subjective, luster, strike, and most obvious marks/flaws.  If the dealer or seller has any prior knowledge or observed that the coin has been altered in any manner, this fact must and will be disclosed to the prospective purchaser before the fact, not after, possibly by a third party.

 

2.)    Written disclosure of the seller's original cost for the rare coin, current Bluesheet and Greysheet wholesale bids for the item, and the percentage markup over seller's origin cost that the purchaser will be paying in the final negotiated price.  Cracked out and upgraded coins or hoards present a rarefied circumstance in disclosing cost which may be 100's of percentage points under the asking price, but what would a reasonable man require to make an informed decision on relative value?  An average retail comparison can be provided based upon Coin World Trends and/or Numismedia.com price data to support the reasonableness of the final price or what the secondary/resale market is offering (versus the primary heavily marketed market).  Rare coin buyers must know at the time of purchase what amount of appreciation will be required to attempt to breakeven on the purchase to include the normal discount from retail that a seller will experience when possibly selling back to the original or to another dealer.

 

3.)   Written disclosure of the combined population counts for the rare coin utilizing both N.G.C. and P.C.G.S. totals to assure that true relative scarcity will be reflected in any representation of rarity made to the prospective customer.  Counts for I.C.G. may eventually be required to be incorporated, but single service counts distort the overall picture.

 

4.)   If a buy-back or repurchase guarantee is presented in any fashion within advertising copy or within the customer invoice, the dealer must disclose under what conditions, either market or business, that he/she would be unable to fulfill this pre-sale promise.   However, in all cases, should any rare coin be proven by a third-party grading service or other recognized numismatic expert to have been altered, cleaned, or doctored in a fashion not originally disclosed to the purchaser, the dealer agrees to provide immediate cash payment for repurchase upon notification in writing, with requisite supporting documentation, of said alterations.  This is a logical extension of the "genuine" guarantee often provided today which will become mandatory under regulation.

 

5.)   In any negotiations to purchase or sell a rare coin to any involved party, professional or retail, no material omissions of fact or misrepresentations of fact will be willingly or knowingly made to effect the transaction in question.  Lack of sufficient numismatic knowledge may cause occasional errors to occur in the course of business, but a pattern of behavior eliciting hyperbole, exaggerated statements of condition and value, and omissions of material fact will constitute grounds for expulsion from the numismatic industry for a period of no less than 7 years.  This is another instance where licensing or certification are critical to establish a progression of punitive measures applied against specific and/or a cumulative series of violations.

 

6.)   Potential conflicts of interest that would potentially influence a dealer's representation of the merits of a particular rare coin in inventory must be fully disclosed to a potential customer.  Some of the more egregious situations today include marketing organizations whose members also have ownership and/or corporate positions in a specific "third-party" grading service that is used exclusively for the certification of a major cache of raw U.S. rare coins.  The appearance of "arms length" transactions must be maintained in all circumstances, or the full extent of the potential conflicts of interest and lose of objectivity must be fully disclosed in advance to any prospective customer.

 

7.)   Licensing of all U.S. rare coin dealers conducting individual transactions over $3,500 with mandatory professional qualifications to include the certification of "numismatists" through standardized testing to attain Master, Apprentice, and Novice levels of knowledge.  All dealers conducting business with out-of-state customers must have access to a minimum of one certified Master Numismatist, either in-house or under contract.


Consider this list just a starting point, to get the discussion going so to speak, for I know from the requested feedback I have gotten from several well-known numismatists and 30-year plus veteran coin dealers that these may be fighting words.  Personally, I know that I'm ready to fight when I spend $5,900 on a $1 Gold Indian Princess MS65 from one of the supposedly top dealers in the country, and find on resale that this P.C.G.S. coin has been doctored.  And if anyone even suggests that I am "complaining to complain", spare me the reverse psychology, condescension, and just show me the money.  Whatever agency is given expanded and more defined powers to regulate the U.S. rare coin industry with well-defined punitive actions and enforcement for transgressions, it will best be at the Federal level to assure uniformity of administration and adequate funding.

Granted, professional associations such as the A.N.A. and P.N.G. have clearly stated Codes of Ethics for members, but it is somewhat unclear to myself (and I am sure to many collectors and consumers) what are the mechanisms for enforcement?  Are adequate resources available to monitor and enforce compliance, and are any stated penalties for transgressors sufficient to encourage full adherence to the stated codes at all times?  The Federal Trade Commission has done a very spotty job in monitoring this "high ticket item" resale business, running hot and cold as to the amount of resources and actions taken, with concentration obviously only upon the most visible and damaging breaches of the public trust.

Only when a marketplace and the organizations that participate within it provide a level playing field for both the experienced and the inexperienced consumer can they hope to reach levels of public acceptance and trust approaching the regulated securities industry today.  The numismatic industry is too fraught with the shortcomings enumerated above to promote the entrance of millions of new collectors and investors who have come to expect fully monitored integrity on behalf of all intermediaries.  This is not to suggest that there are not problems with the execution of securities regulation today within the financial arena.  Due to the length and level of the unprecedented U.S. bull market in stocks, these transgressions are increasing, but still remain a small percentage of the total annual transactional value of the industry. Well-established and publicized SEC ground rules are in place, which require full disclosure of commissions and mark-ups by intermediaries, full disclosure of real or potential conflicts of interest, restrictions on misleading representations of value to include omissions of fact, and standardized payment settlement terms to include the timing of change of legal ownership.  Without similar regulations or, at a minimum, enforced standards, the numismatic or rare coin industry today cannot hope to compete for the collectible or investment dollar that would otherwise come its way.  And even with increasing budgetary constraints on the Federal and state securities regulators, financial market participants know that there is the manpower and resources available to provide a basic deterrent to blatant abuses.  The appeal of tangible or hard assets that embraces rare coins is growing daily to stock investors who have come to realize that technology and dot.com equities can go down 30% to 50% even faster than they went up.  Diversification in investing is one of the key tenets to long-term success, and a long-term cyclical re-emphasis into tangibles probably began as early as mid-year, 1997.

All it takes to bring on punitive government regulation is a highly publicized rare coin marketing scam that defrauds many consumers from several States and entails millions of dollars of lost value.  There could be several of these gross transgressions brewing in the cauldron of public opinion in coin collecting as we go to press.  Usually, consumers don't realize they have been taken for many shekels too many until they decide to sell.  So the time between misrepresentation and realization can be several years.  Should we enter a much more difficult economic period ahead (and the probability is greater than 50% currently), one can rest assured that the political forces that pull the levers of legislative power will be looking for any and all players who have egregiously breached the public trust in any pecuniary manner.  Call it scapegoating or pure politics, the result is the same ----- heavy-handed government intervention on both the deserving and undeserving.  And the publicity and grandstanding that usually accompany this process is not favorable to the products of the targeted industry.

The shenanigans within numismatics today would not pass the acid test (no pun intended for you "curators" out there!) of general public opinion, especially a public accustomed over the last two decades to the rigors of disclosure in the financial markets.  Many quietly accepted practices in numismatics today would never survive the smell test in the financial world.  One does not have to ponder very long the rationale of the indirect submission process for the burgeoning Independent Coin Grading Service, which to date has done an admirable job of eliminating the influence of dealer relationships on the critical and purportedly unbiased grading process.

So if we want to grow the U.S. numismatic marketplace to its full potential and avoid the regulation of most numismatic material by a Federal agency much more punitive and active than the current FTC, then all collectors, dealers, brokers, and auction companies had better do a much, much better job of providing a level playing field for the end buyer and seller.  There is enough money to be made in this trade at a highly ethical level without the shenanigans of curating, misrepresenting collectible value, overcharging, doctoring, hyping, etc.  In the end, if there is to be a major bull market in U.S. rare coins in the quarters and years immediately ahead, then it can only occur with increasing participation on the part of the securities investing public as it re-allocates funds to numismatics.  To gain their full trust and business will be no easy task.  They are used to very high standards of conduct.  Should a major coin scam hit the media and the internet prior to the stock market forcing more investors to take chips off the table, all coin dealers are advised to update their resumes.

  

KNOWLEDGE IS POWER WHEN YOUR HARD-EARNED MONEY IS AT STAKE.

 



 

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