, , , , , , , , , , , ,

jerry-brownWe recently wrote about auctioneers and bonding.

In that article, we mentioned that some states have augmented or completely replaced the requirement for auctioneers to be bonded, and instead have instituted a state recovery fund.

The article on bonding can be read here: https://mikebrandlyauctioneer.wordpress.com/2013/01/04/auctioneers-and-bonding/

A state recovery fund acts similar to a bond, but instead of a private surety company being a party to the arrangement, the state takes on basically two roles.

An auctioneer recovery fund is an arrangement with two (2) parties:

    1. The obligee – the party who is the recipient of an obligation — the state licensing agency (the state)
    2. The principal – the party who will be performing the contractual obligation — the auctioneer
    3. The surety – the party who assures the obligee that the principal will perform the task — the state licensing agency (the state)

As can be seen here different than a surety bond, although there are three roles, the state takes two, acting as both the obligee and the surety.

What are the merits of a recovery fund over a private surety bond? In some cases, the recovery fund maintenance cost for the auctioneer can be less than the cost of private surety bonding. Too, often recovery fund coverage for the public is a bit higher with recovery funds as contrasted to private bonding.

However, it is our belief that private surety bonding is actually better overall for the auctioneer and the public.

Our arguments are as follows:

    1. With a bond, the roles of surety and obligee are distinct, so the entity assuring performance isn’t the same entity in receipt of the obligation and deciding if payment should be made (similar to private insurance where the insurance company contracts to cover risk, but also gets to decide what is paid (or if anything is paid) upon a claim.
    2. State recovery funds are typically housed in the state treasury, and subject to reallocation to other state accounts — effectively forcing licensees to replenish the account, or more likely eliminating licensing altogether. Think that can’t happen? Just ask auctioneers in California.
    3. Well behaving auctioneers (and their clients) can be negatively impacted by poorly behaving auctioneers. As a state pays out for poorly behaving auctioneers, the other well behaving auctioneers must pay into the recovery fund account to keep it at mandated levels. Bonding companies better accommodate this risk by spreading it across state lines (and in other financial instruments) so one auctioneer’s behavior doesn’t impact another.
    4. The cost of a recovery fund for auctioneers is set by the state, rather than the free market. Bonding companies compete for business, and thus rates are typically very reasonable. States, on the other hand, have no competition and can even have adhesionary rates.

We mentioned California.

California auctioneers were licensed and part of a state recovery fund for years. Then, in September, 1992 the Auctioneer Commission formerly under the California Department of Consumer Affairs was eliminated. As a result, all the money those California auctioneers had paid into their state recovery fund was forfeited.

Could another state take this same action? It’s not difficult to imagine. States use a variety of reasons to eliminate licensing agencies/departments, and thus raid recovery fund accounts:

  • There are licensing laws and regulations which clearly benefit the profession but not the consumer or the professional candidate who wants to enter into the profession.
  • In effect, the licensed group, through the board and its licensing program, has set up artificial barriers of entry into the profession that enables it to control the availability and cost of services and to restrict competition.
  • Research finds there are little to no disciplinary actions being taken against licensees.
  • Committees of the boards, made up of volunteer professionals, are making decisions usually according to staff or the executive officers concerning investigations or disciplinary actions to be taken against licensees.
  • Boards are not carrying out their statutory responsibility for particular programs.
  • Boards are not operating their licensing, examination and enforcement programs in an effective and efficient manner; they are not responding to consumer complaints, nor resolving complaints in a timely fashion. Program spending is not prioritized and some programs are too costly or completely unnecessary.
  • Boards lack definitions of professional standards or what amounts to incompetent, negligent or unprofessional conduct.

Auctioneer recovery funds are less secure and less equitable than private surety bonds, to the detriment of the auctioneer and the public.

Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.