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Rare U.S. Coin Investments: A Practical Guide for Financial Advisors

By Burnett Marus, RFC


Copyright Š Burnett Marus All rights reserved. Reproduction or translation of any part of this work without permission of the copyright owner is unlawful. Written requests for permission of further information should be addressed to: Burnett Marus Associates 908 Audelia Road Suite 200 PMB 150 Richardson, Texas 75081 Manufactured in the United State of America August 2003, First Edition

Rare U.S. Coin Investments: A Practical Guide for Financial Advisors ISBN# 0-9747477-0-X Copyright Š Cover Art by Carl Watson, Photography by Jody Garver, 2003, Photos courtesy of Heritage Capital Corporation, Dallas, Texas


ACKNOWLEDGEMENTS

I would like to thank the following individuals for their assistance and/or input in the production of this work: Richard Austin, Deputy Head of Compliance, ScotiaBank, Toronto, Canada for his encouragement, support and excellent editing input.. Ed Morrow, ChFC, CFP, RFC of Middletown, OH Paul Minshull, CEO of Heritage Capital Corporation, Dallas, TX Raymond Lombra, PhD, Dean of Economics, Penn State University Thank you to all the financial advisors that I have worked with over the past 29 years who provided me with the inspiration to produce this work. There have been many books written for the collector, some for investors but this is one of the few written specifically for the financial planning community. I wish to dedicate this book to the memory of two financial planning professionals who directly influenced me to write a reference work for our profession. They were outstanding members of the the financial planning industry, great friends and great planners. Ray McCorquodale of Calgary, Alberta, Canada James Guillery of Farmington Hills, MI

A heartfelt thank you to my wife and best friend of 37 years, Shirley, for helping me keep my focus and commitment to complete this project.

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TABLE OF CONTENTS

Introduction Chapter 1 - The Basics of Tangible Asset Investing...............................................................................................1 Chapter 2 - The History of the Rare Coin Market Over the Past Generation.........................................................5 Chapter 3 - Bullion Coins and Numismatic Coins: The Differences......................................................................13 Chapter 4 - Independent Grading Services...........................................................................................................15 Chapter 5 - Population Reports and Their Use......................................................................................................17 Chapter 6 - Rare Coins in Financial Planning Applications....................................................................................19 Chapter 7 - Penn State University Rare U.S. Coin and Gold Study.......................................................................21 Chapter 8 - Rare Coins in Retirement Plans..........................................................................................................25 Chapter 9 - How to Protect Your (and Your Clients) Assets: Tips on Preventing Fraud Loss................................29 Chapter 10- Rare Coin Investments and Financial Advisors: A 25 Year Perspective............................................31 Chapter 11 - Compliance Issues for Canadian Financial Advisors Concerning U.S. Rare Coin Investments.........35 Chapter 12- Rare Coins and Cash Transactions: The Danger of “Structuring�.......................................................37 Chapter 13- Appraisals of Rare Coins and Other Tangible Property.......................................................................39 Chapter 14- Rare U.S. Coins: Special Considerations for Registered Representatives, Requirements Under NASD Codes 3030 and 3040...............................................................................................................45 Appendix 1- Certified U.S.Rare Coins vs. Selected Collectibles

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INTRODUCTION A question that is often raised by financial advisors is what role tangible assets have in asset allocation and diversification in financial portfolios? There is no correct answer...just opinion. Tangible assets are ways of wealth accumulation that existed long before stocks, bonds, mutual funds and other paper assets. Wealth has been measured in land, gold, silver, gems, art, animals, shells and other real assets for ages. The wealthy client can, and does, use his wealth to acquire expensive tangible assets as well as traditional equities. Besides the obvious homes, automobiles and yachts, wealthy clients purchase art, jewelry, antique furniture, rare stamps, rare coins, oriental rugs, GallĂŠ glass, Tiffany lamps, Miessen porcelain, FabergĂŠ eggs and numerous other physical assets. The role of financial planners is to recognize, and properly categorize, these assets in the overall plan of the client's financial position. For example, is there adequate insurance to cover these assets, how are these assets titled, what is their cost basis for capital gains or losses, how are they evaluated to ascertain the clients correct net worth? With a little education, rare coins are as easy to evaluate and categorize as stocks, bonds and mutual funds. It is financial planners' responsibility to provide their clients the data necessary to help make intelligent, informed decisions on various investment opportunities and whether or not these assets are suitable for their clients goals or needs. This separates them from the telemarketers and product-pushing salesman. Unfortunately, at the present time there is no organized study program or licensing for financial planners to follow to become knowledgeable in this area. The majority of rare coin investment transactions are made by telemarketers or direct coin marketers with no expertise, and perhaps no interest in, financial planning. As a result, many clients who purchase rare coins for investment purposes may not be receiving proper guidance with regard to suitability, risk and asset allocation. Other clients may not be aware of the potential of the investment simply due to the fact that their financial advisor is not qualified or adept in the use of rare coins, as an additional asset to hedge traditional paper investments. This book is purposely written for the benefit of financial advisors. There are plenty of books written about rare coins for the consumer. The intent of this book is to share information I have learned over the past 30 years as a planner specializing in hard assets, and as a key executive officer in the oldest and largest rare coin investment firm dedicated to working exclusively with the financial planning profession. This book will discuss the history of rare coins for the past quarter century, the use of rare coins in planning applications, performance, grading, definitions and due diligence topics. I have also included a chapter for my Canadian friends in the financial planning industry. The asset class that is discussed in the following pages is among the oldest of pursuits in history. Coin collecting predates the birth of Christ and has existed in almost every society for centuries. It has always been a store of wealth and prestige. Rare coins are not a complicated asset. Hopefully, this book for my fellow professionals will bear this out. Burnett Marus, RFC Dallas, TX III


Chapter 1 THE BASICS OF TANGIBLE ASSET INVESTING If you are like the vast majority of financial professionals, you entered the profession through the securities industry, the insurance industry or the accounting field. You are probably not familiar with tangible asset investing. The area is unregulated and unlicensed, conjuring up images of survivalists hoarding silver or bespectacled eccentrics practicing the mysterious arts of numismatics and philately. However, you should understand the basics of tangible investing for three excellent reasons: ◆ Some of your clients are probably already "investors" in tangibles. Understanding tangible assets can be important for financial and estate planning. ◆ With low inflation, interest in tangible assets is currently at an ebb. But the minute inflation heats up, your clients may start asking questions on how to diversify away from paper assets. ◆ Under the right conditions, properly selected tangibles can make an excellent investment and should be part of your investment planning options. MARKET DOMAIN AND SUPPLY DYNAMICS Tangibles come in two categories: industrial-based and collector-based. The chart below lists major tangibles in each category. The key differences between the two relate to market domain, supply dynamics and unique asset characteristics. TANGIBLE ASSETS INDUSTRIAL-BASED Gold bullion Silver bullion Diamonds Precious Gems Platinum

COLLECTOR-BASED Rare Stamps Rare Coins Old Masters Chinese Ceramics Antique Autos Antique Furniture Rare Wine, etc.

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MARKET DOMAIN AND SUPPLY DYNAMICS Industrial-based tangibles are bought and sold by major industries. For example, gold is used in dentistry, electronics, solar energy, and jewelry. Silver is used in photography and electronics. Diamonds and precious gems are used in jewelry and lasers. Investors and speculators compete with industrial buyers, purchasing and selling these commodities in anticipation of price movements. The supply of industrial-based tangibles is increasing, but at a diminishing rate. With the exception of industrial usage and consumption, gold, silver, diamonds and precious gems are not "disposable". The vast store of these resources discovered in the past still exist today. And, supply grows with continued mining; manifest the recent major discoveries of diamonds in Australia and Canada. Notwithstanding general increases in industrial demand, prices vary considerably depending on changes in investor sentiment. Collector-based tangibles have no industrial buyers. The market varies from 100% collectors to 60% collectors/40% investors (speculators) depending on the nature of the collectible. Liquidity and price are impacted by this investor/collector ratio. Collectors buy at all phases of the economic cycle, establishing a market. The more the tangible is geared towards specialty collecting, the less prices are influenced by investors. Baseball cards are a good example of specialty collecting. They have relatively few collectors (compared to rare stamps or rare coins) and the market is regional, centered in Midwest states , rather than international such as stamps or rare coins. Investor influence is negligible characterized by speculation rather than sustained, measurable growth. Other similar examples are beer cans, Depression glass, Avon bottles and yes, Beanie Babies. On the other hand, rare coins and rare stamps have extremely large collector bases. The larger the total collector base, the larger the investor involvement and the more liquid the tangible. So, coins and stamps are relatively easy to sell without adversely impacting prices. All collectibles with real investment potential were originally produced for a utilitarian purpose; therefore wear and tear affects current supply, as well as price. Condition is paramount to the collector because the items are no longer produced. Items in excellent condition will become more valuable over time as the pool of undamaged items slowly shrinks. For example, stamps and art can deteriorate due to excessive heat or humidity. Natural disasters such as hurricanes, earthquakes, fire, flood are risks that reduce the supply of such tangible assets. A rare stamp collection lost in a flood cannot be replaced, a Picasso destroyed in a fire is gone forever. Further, normal consumer use has reduced the supply of such collectibles. In 1953 General Motors introduced the Corvette as sporty transportation. It was NOT intended as a collectible. The vehicle was purchased by the public and used as intended...sporty transportation. Today, a 100-point concourse condition 1953 Corvette will bring $75,000 at auction. The vast majority of 1953 Corvettes have long been relegated to the scrap heap after 40 years of usage. The same circumstances of consumption apply to comic books, furniture stamps and coins. 2


UNIQUE CHARACTERISTICS Industrial tangibles have no unique characteristics. Gold is gold; silver is silver. The value of a Canadian Maple Leaf gold coin is based on the price of gold per ounce, regardless of date or condition. Diamonds and gems are classified into uniform price categories by carat weight cut, clarity and color. The valuations are based on quantitative factors. A collectible, however, has a unique quality or feature that separates it from similar items. In numismatics, a United States $20.00 St. Gaudens can vary from $500 to $500,000 based on condition, issue date and mintmark. A water stain on a rare stamp can reduce its value by hundreds of dollars. Here values are based on qualitative factors. ADVISING YOUR CLIENTS Few investors fully understand industrial-based or collector-based tangibles and many have been mislead as to the safety of tangible investing. Interestingly, in Europe, the Middle East and the Far East, the benefits of tangible assets as a store of wealth have long been recognized. Tangible assets have persevered through wars, economic upheaval (hyperinflation in Germany in 1923, the fall of the ruble in Russia in 1998) and currency reform and debasement. In the United States and Canada, such events have not occurred, giving a strong bias in favor of the equity-based position of financial advisors. Nevertheless, tangibles have legitimate financial planning uses and should be considered in the portfolio planning process. But, you'll need to educate your clients. When clients express interest in tangibles, you should first distinguish industrial-based from collector-based tangibles. The former are highly speculative, inflation-dependent and subject to rapid price movements. Collector-based tangibles, by contrast, are more conservative investments (although commonly perceived as more speculative), inflation sensitive (not inflation dependent), and more stable in price. The fact that collectibles are in ever-diminishing supply provides a powerful hedge against loss of value over the long term, while bolstering values during periods of high inflation or inflationary expectation. The majority of firms dealing in tangibles can be classified as retailers and do not have a financial planner's understanding of client's suitability standards, fiduciary responsibilities and securities regulations. Thus due diligence is essential in choosing suppliers of investment collectibles. Obviously, all collectibles are not advisable as investments. There are five major factors to evaluate in possessing tangible assets. (1) the size of the legitimate market, (2) the availability of expertise, (3) the minimum investment required, (4) storage, maintenance and portability and (5) the long-term investment history. 路 Size of Market - The market for a collectible should be large, well organized and preferably international. This is important because market size determines liquidity. 路 Availability of Expertise - This refers to the number of organizations, text books, newspapers, magazines, price guides, trade journals, dealers and authenticating organizations that exist and are readily available to evaluate the tangible. This data will validate pricing, frequency of trading, market size and number of legitimate dealers active in the target market. 3


路 Minimum Investment and Diversification - You should match the financial resources of your client with the minimum investment required to take a position in the collectible. The range of investment should be between 5% and 10% of the total investment portfolio. Balance "internal" and "external" diversification. External diversification reflects the percentage of total investor assets held in all tangible asset classes. Internal diversification refers to the number of items within the tangible asset class held. 路 Storage, Maintenance and Portability - Ideally, an investor should be able to store collectibles off personal premises to safeguard against loss, theft or damage. Storage concerns also dictate the use of tangibles. It is important to understand the special storage needs for the asset. Is it large (such as antique furniture) or can it be stored safely in a small space. A major rule for the investor in tangibles is "if it can break, don't invest in it". Because of this, investments in items such as Gall戮 glass or Tiffany lamps is not recommended. The portability feature is also important. When liquidating a tangible investment it's portability has an impact on the proceeds of the sale. For example, when selling a classical automobile, the costs of shipment by a specialized carrier experienced and equipped to safeguard such vehicles must be considered. Rare stamps on the other hand can be shipped via insured mail. 路 Long-Term Investment History - any collectible that is considered should have a history of appreciation. The minimum performance history is five years; ten years is excellent. Looking at a long term will eliminate "fad" investments (Cabbage Patch Dolls) since their performance is characteristically sporadic and short-lived. EVALUATING A COLLECTIBLE For most clients, rare coins are more suitable investments than other types of collectibles. Coins have a large international market, the largest empirical database of information, the greatest ease of storage, and portability, no special maintenance requirements and the most firmly established record of long-term performance. (A chart comparing investment characteristics of the most popular tangibles is in Appendix 1). When evaluating rare coins, you should consider diversification and liquidity. The price of any one coin should not exceed 25% to 30% of the total coin portfolio. A large portfolio of inexpensive coins may seem safest, but rare (and expensive) collectibles tend to appreciate at higher rates than more common coins. Price also effects liquidity. The marketplace resembles a pyramid with most buyers at the bottom spending $1,000 or less per coin and a few at the top spending more that $25,000 per coin. Moreover, studies show that the highest priced (usually the rarest) coins become available on the market primarily four months before and two to three months after the peak of a cycle, This is the period for liquidating at the optimum price. Afterward, prices weaken due to a decline of buyer's interest. To gain optimal value for a rare coin, the investor may have to wait months or years until the next cycle peaks.

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Chapter 2 THE RARE COIN MARKET OVER THE PAST GENERATION INTRODUCTION AND PREFACE [BEFORE 1972] A quarter century is long enough to illustrate several boom and bust cycles, and illustrate the behavior of a market in a variety of economic environments. Unfortunately, such long-term studies are comparatively rare in the world of numismatics. The primary reason is the difficulty of uniform pricing information. The definition of what constitutes a gem uncirculated (MS-65) coin differs markedly today from what it did even 15 years ago. Prior to 1975, evidence of the use of the numerical grading system (except for U.S. Large Cents) is scarce. And if we go back more than 30 years, we find very little distinction between uncirculated coins at all. Superb gem coins might have commanded a small 10-20% premium, but today's focus on the quality of a particular uncirculated piece was simply not present. Further, the very core of the market has changed. From the late 1950s through the mid-1960s interest was focused on uncirculated examples of post-1934 issues traded in roll quantities. As silver dollars were still available from banks and ownership of gold was restricted prior to 1975, one can appreciate why these bulwarks of today's market were virtually ignored. Speculation in uncirculated rolls reached a peak during 1963-64, and then prices collapsed. Events then moved rapidly from 1964 to the end of the decade. The coinage crisis of 1964-65,brought on by the conversion to clad (non-silver) coins saw virtually all of the dimes, quarters and halves dated prior to 1965 removed from circulation during the late 1960s. The government released the last silver dollars from its vaults in 1964 (with the exception of a few Carson City dollars sold at premiums in the early 1970s.) The redemption of silver certificates (for silver coins) ended in 1968. With all of these major events taking place, it's little wonder that truly rare coins (type coins of the eighteenth and nineteenth century) took a distant back seat. It was not until the beginning of the 1970s that attention in the numismatic market returned to the rare coins which had been so unceremoniously ignored for the previous 15 years. And it's here we begin our review of the market over the past generation. THE FIRST BULL MARKET [1972-1975] Once circulating coinage ceased to be a viable source of material, many new collectors who had joined the hobby during the 1960's turned to dealers to purchase their coins. Type coins, rare date and territorial gold coins, patterns, colonials and commemorative coins all were scrutinized, and found to be vastly underpriced. Areas long dormant saw renewed activity, and prices climbed steadily over the next three or four years. The increases were healthy and virtually "across the board." The Coin Dealer Newsletter (the industry's standard wholesale pricing reference) which had heretofore been a listing of Brilliant Uncirculated (BU) roll prices began to devote space to type and gold coins. Two columns in the "uncirculated" category appeared, one for basic Uncirculated (MS-60) coins and the second for Choice/Gem Uncirculated (MS-65) coins. Price differences were slight, to be sure, but it signified the birth of a new generation of collector - one with a discriminating eye, interested in quality, not quantity. GOLD BULLION FUELS THE MARKET [1975-1978] After a very active three years, the market paused for a while in the mid-1970s. There were few declines in coin prices, the rate of increase simply slowed. In early 1975, the last restrictions on the American public's right to own bullion-related gold coins was lifted, and suddenly Kruggerands were the rage. The price of gold shot up from $100 to $200 during this period, and demand began to grow for U.S. $20 gold coins (both St.Gaudens and Liberties) as imports of these pieces from Europe began on a massive scale. A $10,000 investment in 4 sets of 10 piece common date MS65 gold coins increased to $14,569 during the period 1975 to 1978. The actual coins in this model set is described at the end of this chapter. The equivalent internal rate of return on these coins was 13.36% per year for this period. The nation celebrated 5


its bicentennial with special reverses on the quarter, half and dollar, and the general level of sophistication among collectors continued to grow. A "new" grade; MS-63, made its appearance, reflecting the increasing scrutiny (and quality consciousness) of the coin buying public. At the time, some dealers questioned the need for such an "in-between" grade, as price spreads between MS-60 and MS-65 coins were still relatively small. Such would not be the case for long. Much of the increase during the 1973-74 period was attributable to the inflation accompanying the first energy crisis. DEBUT OF THE RARE COIN "INVESTMENT" MARKET [1979-1980] The second energy crisis of 1979 brought with it double-digit inflation, and bullion prices that literally went through the roof. From the summer of 1979 through early 1980, gold soared to $850, (from roughly $300) and silver rocketed to over $50 per ounce, a ten-fold increase (due in part to the Hunt brothers' attempt to corner the silver market). The buying frenzy sweeping the oil and bullion markets spread to all tangible assets, and prices for both rare coins and stamps virtually "added a zero" from mid 1979 to mid 1980. Some of the fuel for these increases stemmed from the massive profits dealers had made in the trading of gold and silver bullion. During this period, stocks were out of favor (in 1982, a cover of Business Week was trumpeting "The Death of Equities"). Tangibles were so much the rage, that a magazine debuted called The Collector-Investor. It extolled the profits in rare coins, stamps, art, rugs, wine, watches, furniture and anything else tangible and collectible. It was the classic inflationary scenario; too much money chasing too few goods. It was during this period that rare coins crossed from the pure collector asset to the collector-investor asset. Many financial advisors routinely recommended rare coins to their clients. However, commissions to advisors in many cases were huge and broker dealers did not concern themselves with coins since they were not considered a security. Numismatics as a form of collecting art and studying history existed as early as ancient Rome; it was not until 1979 that the financial planning community began to transform the coin world. The price of the 4 sets of common date gold coins set stood at just over $21,301 at the beginning of January, 1979. By January of the following year, it exceeded $66,348. The market peaked in January 1981 with that gold set being valued at $136,867! These were price changes, the likes of which had never been seen or even imagined. Collectors who had patiently built sets during the 1960s and 1970s were rewarded with profits, which can only be described as fabulous - if they sold. New England Rare Coin Galleries, a prominent Boston coin dealer, put together a rare coin fund of approximately $350,000 in early 1977and sold it in March 1980 for over $2 million, earning the lucky investors a return of around 600% in the short space of only three years. Such gains were not uncommon, as auction records from the period can attest. Many coins bought during the mid 1970s for $400 or $500 were sold during this period in the $2,500-$3,000 range. It looked like, for a while, you couldn't lose. There was a dark side. Rare coins had hit "the big time" and fly-by-night numismatic investment companies sprouted like dandelions after a spring shower. Financial advisors did not understand the proper method of performing compliance investigations on rare coin firms during this period. The majority of the price increases had accrued to the higher-graded (MS-65) pieces, and virtually all of the promotional activity centered around these specimens. Unfortunately, to the untrained eye, very little visually separated these coveted "gems" from pieces of lesser quality. The price however, was a different matter. The boom of 1979-80 had widened the price spreads between grades from perhaps 50% or 100%, to the 400% - 600% ranges. Accurate grading became critical, but many of these "instant advisors" lacked the requisite skill - or the desire - to distinguish the superior pieces. Third party grading was available from the American Numismatic Association Certification Service (ANACS) and the International Numismatic Institute (INS). Both services, however, provided only non-binding opinions (simply, anyone one could disagree with their opinion and there would be no recourse with the grading service) setting the stage for a major change in the coin industry four years later. 6


THE COIN MARKET DECLINES [1980-1982] Although bullion prices had peaked in mid-January, 1981, the rare coin market continued to rally for another three months. Dealers were still reaping their profits from the silver-based pre-1964 coins and other silver items (flatware, jewelry, etc) sold to smelters, and the sheer exuberance, which had intoxicated the market, was difficult to shake. Reality knocked at the Central States Show held April 17-19 in Lincoln, Nebraska. Tax time had just come, and many dealers were facing hefty bills. Bullion prices, while still high, were continuing to fall and all of a sudden, everyone was a seller. The fall was rapid and steep. Within two years, the market had fallen by nearly two thirds, and the lack of liquidity in the market seemed to make matters worse. Prices were low, but there were very few buyers even at these lower prices. Our model gold type set fell from $136,867 to $94,109. THE PHANTOM BULL MARKET [1983-1986] By 1983, the general economic recovery that was sweeping the nation had put discretionary funds in the hands of many baby boomers, and with memories of the bullion panic still fresh in the minds of many, rare coins held considerable appeal. Silver dollars and gold coins, which had played second fiddle to type coins during the boom of 1979-80 were a particular focus, and bid prices rose substantially for the next three years. Common date silver dollars, which at the beginning of the period were worth around $100, were bid at over $800 at the end. Our model gold coin set, having begun 1983 at just over $90,000 had soared past its previous high set in 1981, and crested close to $220,000 in the fall of 1985. There was, however, a catch. In these years, dealers (the sellers) graded their own coins. If the buyer (whether it was a dealer or a collector) agreed with the grade, then a sale was likely to take place, provided the price was fair. Dealers wishing to purchase coins were able to place bids to buy coins at a specified grade. A transaction only took place though, if the bidding dealer accepted the proffered coins at the grade. For example, a dealer might place a bid to buy MS-65 Morgan dollars at $350. He could be sent one hundred coins from a variety of sources. But, he might buy only ten pieces of the hundred sent. Ninety could be "rejected" because he did not personally feel they were MS-65s. The following week, the dealer could raise the bid to $375. Again, one hundred coins could be sent, equal in overall quality to those sent the prior week. This time though, he might purchase only five, having slightly raised his standard for a coin to qualify as MS-65. Wholesale "bid," however (as reported by the Coin Dealer Newsletter) would show a $25 increase. In reality, the bidding dealer was merely offering a little more for a slightly nicer coin. By all appearances though, the value of every Morgan dollar ever graded MS-65 rose by $25. In essence, dealers could make a selffulfilling prophecy by promoting an issue, forecasting a price rise and then bidding on that issue himself to raise the price. Few, if any, coins needed to have actually traded. The mere appearance of his bid was enough to move the price sheets. Problems with this system had become obvious by 1985. Many dealers and collectors were holding coins, which while accurately graded in the past, no longer were liquid at the current bid levels. "Gradeflation" had eroded their value relative to published bid prices. Most of the coins hadn't really fallen; they just weren't worth the huge prices listed in the sheets. An MS-65 Morgan dollar purchased for $125 in 1983, was perhaps worth $150 two years later, as an MS-63 or MS-64. Few though, were worth the $750 shown for an MS-65. Unrealizable paper profits were a bitter tonic for investors. In early 1986, the coin market ushered in the modern era with a huge reform.

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THE GRADING REVOLUTION [1986-1988] As mentioned earlier, coin grading by an independent third party existed. The American Numismatic Association Certification Service (ANACS) had been issuing certificates with a grading opinion for nearly ten years. But two crucial elements were lacking. 1) the coins were not sealed, meaning that prior to purchase, the coin still had to be physically examined by the prospective buyer since mishandling or damage could have occurred since the coin had been graded. This eliminated the possibility of placing a "sight unseen" bid, and 2) the bidding dealer could still disagree with the opinion of ANACS. There was no market mechanism which obligated the dealer to purchase the coin on which he was bidding. In early 1986, the Professional Coin Grading Service (PCGS) began operations. The Numismatic Guaranty Corporation (NGC) followed this the following year. These two new services differed markedly from previous independent services. They sealed coins in tamper-proof plastic holders, known throughout the industry as "slabs". It was absolutely impossible to open a slab without destroying it. As a direct consequence, it now became possible for dealers to place "sight-unseen" bids for PCGS and NGC certified coins, since they were now guaranteed to be in the exact same condition as they were when they left the grading service. Many dealers scoffed at PCGS and NGC, questioning the viability of a "standardized grading system." However, after a glimpse of market acceptance for PCGS and NGC, more grading services appeared. Into the fray, which already had ANACS, INS, PCGS, NGC, and NCI (Numismatic Certification Institute), came Hallmark, Compugrade, Photo-Certified Institute and others. All touted grading expertise and the "most conservative standards in the industry'. (For more detail on grading organizations see Chapter 4). At the same time the electronic bidding network evolved with the American Numismatic Exchange (ANE) providing instant transactions for dealers. ANE chose to report only PCGS coin prices, forcing dealers to subscribe to another service, the Certified Coin Exchange (CCE) to get other certified coin prices. ANE disappeared and CCE became the primary service. PCGS and NGC became the dominant grading services. For the first time there was true liquidity in the market. New rules obligated each dealer placing a bid to purchase a minimum quantity of coins at his posted bid. Arbitrarily increasing bid levels came at a price that many dealers were reluctant to pay. This resulted in a two-year adjustment in bid levels for most coins, as the market makers learned to cope with the new rules. By early 1988 minor modifications to the trading rules and an adequate supply of certified coins attracted the attention of several prominent Wall Street investment houses. The industry was beginning to show signs of orderliness, but the grading revolution had to survive two near fatal events: the much publicized counterfeiting of PCGS holders and the investigation of PCGS by the Federal Trade Commission (FTC) concerning violations in advertising and promotional claims. The counterfeiting case was unique. Rather than counterfeiting coins, a coin dealer in California decided to counterfeit the PCGS cases in which the coins were housed. This enabled him to also duplicate the "certificate" of the coin, also in the case, which listed the grade of the coin. By substituting an altered certificate with a higher grade in the case, the coin could be sold for much higher prices than it was actually worth. It was a startling revelation to the coin industry when the plot was unmasked in April of 1989. Two years later, after trial, the dealer was convicted and sentenced to 5 years in prison plus ordered to make $1.1 million in restitution to PCGS and $200,000 to Heritage Capital Corporation (the firm who originally discovered the counterfeits). The actions by PCGS to repurchase any of the counterfeit PCGS coins under their guarantee program provided the coin industry with the assurance that the PCGS provided a legitimate and credible service. As a further result of the counterfeiting, new safeguards were immediately introduced to protect the integrity of the certified coin holders. Tamperproof, copyrighted cases with hologram security devices were developed along with barcoding and internal audit procedures. Certified coins are now considered to provide the highest degree of security against counterfeiting of either the holders or the coins. 8


The FTC investigation of PCGS involved advertising claims involving "objective and consistent grading". The investigation spanned three years resulting with PCGS signing a consent decree with the FTC in September 1990, agreeing to continue essentially what PCGS was doing all along - grade as consistently and as impartially as possible, maintain all anti-self interest policies, and make certain that all marketing statements are truthful concerning the value and liquidity of PCGS coins. Requiring PCGS to do these things via a consent decree is like requiring that in the future, yardsticks be thirty-six inches long. PCGS was not asked to admit to any wrongdoing or to pay any fine or accept any penalty whatsoever. The conclusion of the investigation left PCGS much stronger in the eyes of the coin industry. The stage was set for the decade's second great bull market in coins. THE WALL STREET EFFECT [1988-1990] The involvement of Wall Street in rare coins was looked on with great anticipation by all coin dealers. The usual method of business for coin dealers was with the individual collector and other dealers. The transactions normally were of modest amounts. A "good" coin customer would spend $2500 to $5000 a year on his purchases. "Haggling" with the dealer on price and coin "returns" (a client returning a coin to a dealer for refund because the client did not like the coin for personal reasons) were part of the deal. Now, the reality of fund managers with hundreds of thousands of dollars to invest in coins arrived. Unlike collectors, fund managers did not have a price resistance level. Returns were not experienced. The primary task of the fund manager was to acquire coins for the partnership. With the nature of the asset being limited in supply, the prices for rare coins escalated dramatically. In the competition for business, coin dealers became "numismatic investment counselors" and the long time small collector was being virtually ignored. The 1988 ANA Auction looked like a stockbroker's convention with myriad blue suits, white shirts and power ties wandering on the bourse floor. Numismatic Ventures Fund initiated a $15,000,000 fund; Kidder Peabody acquired $42,000,000 in their first offering; Shearson Lehman Hutton was in the headlines touting their intentions of marketing rare coins through their network of 11,000 brokers; Continental Investment Group had a $36,000,000 fund and Merrill Lynch entered with a $50,000,000 fund. And this was supposedly only the first phase of involvement by partnerships and funds. There were constant rumors of other major Wall Street firms entering the rare coin market. The massive influx of new money into the market had an intoxicating effect. Prices skyrocketed to previously unheard of levels in virtually all series, with coins graded MS-65 and higher enjoying the largest gains. Many watched in amazement as prices spiraled upwards of 10% per week, fueled by a seemingly endless supply of cash from the "institutional buyers." The 4 set 10 piece gold portfolio that has been referenced as our price model soared to nearly $566,000 by June of 1989, more than double its price of just a year before. Remember that 14 years earlier, the bid price stood at only $10,000. Financial planners jumped on the rare coin bandwagon en masse in response to the much publicized gains. Many smaller rare coin funds and partnerships were being formed to provide outlets for the heightened demand. The market took a breather in the fall of 1989, but as the new decade dawned, it appeared that the market was again heading north. Appearances were deceptive. 9


THE LONG BEAR MARKET [1990-1994] The start of the Gulf War in August of 1990 saw a 500-point drop in the stock market over a two-week period. Wall Street firms found their equities positions drastically lower in value. Commitments to rare coin funds by these firms abruptly stopped. As a result, the 1990 ANA Sale was a disaster. Dealers awaiting the millions from the funds and partnerships were left abandoned. From August through November of 1990, the market was literally in a free-fall. Stunned dealers, many desperate for cash, dumped their coins onto a market filled with others in the same position. Other dealers held their inventory, certain that the declines would abate. When they didn't, they discovered that the value of their inventory had fallen by nearly 50%. Cash was king and no one in the numismatic marketplace had it. By the end of 1990, the freefall had ended, but many of the major market makers had been severely crippled. Their liquidity was nil, and the market value of their inventory was, in most cases, well under their cost. From 1991 through 1994, the market fell steadily. While certainly not the bloodbath of 1990, the declines were unremitting and over the four year period, rare coin values halved yet again. Our model gold coin portfolio, which had crested at around $566,000 in mid-1989, and had fallen to $235,000 by the end of 1990, eventually slid to $126,468 by the end of 1994. All was not despair and gloom however. Coins continued to trade, and as they approached "bargain" levels, many collectors began to return to the market. MS-65 Morgan Dollars at around $100 looked a lot more appealing to collectors than they did at $350. THE MARKET BOTTOM, AND OPPORTUNITIES AHEAD [1995-2003] After five years of decline, the market reached equilibrium. The demand for coins at 1995 prices began to build, and while not yet strong enough to bring on another bull market, it was sufficient to halt the decline and establish a firm "bottom." 1996 saw continued support at these base levels, and the word "recovery" began to appear in the trades newsletters. The overall rare coin market remained near its low point. But the stunningly high results of the Eliasberg and Pittman auctions, the purchase of the Trompeter collection by Heritage Rare Coin Galleries for a world record $15.1 million and the strong prices realized of the 1998 ANA auction confirmed that, better grade investment-quality pieces were being snapped up and prices for them were steadily increasing. Rare coin auction activity is solid, and high quality pieces are continuing to garner record prices. In 1999, an 1804 silver dollar realized $4.1 million, the highest price ever paid in public auction for a single U.S. rare coin. In August 2000, a 1919-D Mercury Dime in MS66 condition was purchased at auction for $218,500 setting a world record for a Mercury Dime. More amazing was the fact that at the time of sale the listed market wholesale dealer price for this coin was $32,000. In 2003, the record for the highest price paid for a U.S. coin was broken with the sale of the 1933 St. Gaudens $20.00 gold piece for $7.1 million. 2003 also witnessed a record price for the 1913 Liberty Nickel selling for $3 million. Rare coins are now being recognized as assets of significant value by the general public. UBS Paine Webber stated in January 2003 that it was introducing its Arts and Numismatic Division to their private banking clients in the United States after successful results in their European market for the past several years. Those of us who saw the "hot" market of 1988-1990 might characterize this sector as "warm". There is strong demand from wealthy investors who have made record profits in the stock market but every day become more nervous about their prospects for continuing profits from equities. In view of the economic environment over the past several years - flat bullion prices, low inflation levels and a red-hot stock market- the lackluster performance of the overall coin market is not surprising. But, the only constant is change. The market is like a coiled spring. There is substantial potential for energetic growth. Looking at the trend from the mid-1970s, we see that the market is where it's supposed to be. Over the past 25 years, the common date 10-piece gold set returned to its long-term investors approximately 14% per year. From 1975 to 1994, it significantly outperformed the S&P 500 Index; since 1995 and the continuation of the bull market in stocks, it has lagged behind. Obviously, much more could have been earned with "perfect" timing. Also, quite a bit could have been lost with poor timing. We view the risk now as minimal. It does not appear that the market will be headed any lower, and given any external stimulus whatsoever, could easily make a strong upward move. Those patient investors with the wisdom to purchase at the bottom, will be the ones who reap the reward at the top. 10


ABOUT THE CHART To illustrate the long-term history of the coin market (not always an easy task) I have chosen 4 sets of a common date 10piece gold set in MS65. The extremely rare and esoteric coins of this series was not included as it would not be representative of coins that would have traded actively during any market period. The values of gold bullion and the S&P 500 over the same period are included as a comparison. Date 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Value -Gold $ 10,000.00 $ 7,383.00 $ 7,062.00 $ 8,881.00 $ 11,930.00 $ 30,762.00 $ 27,980.00 $ 20,262.00 $ 24,021.00 $ 20,276.00 $ 16,371.00 $ 17,601.00 $ 20,865.00 $ 25,680.00 $ 21,935.00 $ 21,453.00 $ 20,490.00 $ 18,939.00 $ 17,548.00 $ 20,704.00 $ 20,437.00 $ 20,564.00 $ 19,504.00 $ 15,974.00 $ 15,429.00 $ 14,893.00 $ 14,204.00 $ 14,681.00 $ 18,640.00

Value- S&P 500 $ 10,000.00 $ 12,357.00 $ 11,441.00 $ 12,172.00 $ 14,387.00 $ 19,030.00 $ 18,076.00 $ 21,952.00 $ 26,867.00 $ 28,506.00 $ 37,505.00 $ 44,466.00 $ 46,733.00 $ 54,365.00 $ 71,419.00 $ 69,084.00 $ 90,092.00 $ 96,949.00 $ 106,663.00 $ 108,071.00 $ 148,684.00 $ 182,822.00 $ 243,829.00 $ 273,088.00 $ 314,027.00 $ 375,356.00 $ 228,968.00 $ 199,000.00 $ 150,982.00

Value- Rare Coins $ 10,000.00 $ 9,195.00 $ 11,834.00 $ 14,569.00 $ 21,301.00 $ 66,348.00 $ 136,867.00 $ 109,028.00 $ 94,109.00 $ 122,608.00 $ 128,428.00 $ 219,414.00 $ 223,585.00 $ 236,098.00 $ 563,040.00 $ 365,108.00 $ 235,050.00 $ 161,020.00 $ 183,562.00 $ 159,739.00 $ 126,468.00 $ 136,280.00 $ 149,040.00 $ 155,640.00 $ 154,520.00 $ 127,300.00 $ 111,260.00 $ 120,000.00 $ 131,260.00

Using the data above we can illustrate the exponential performance of rare coins compared to the long term performance of theS&P 500. Beginning in 1975, the following chart shows the length of time required by each asset class to reach various investment levels. Initial Investment of $10,000 in 1975 grows to: $14,000 $20,000 $109,000 $235,000

Gold Bullion

S&P 500

5 years 5 years N/A N/A

4 years 7 years 19 years 22 years

Rare U.S. Gold Coins 3 years 4 years 7 years 13 years

The examining both charts illustrates the potential benefit of asset class diversification using rare coins and the S&P 500 in an investment portfolio. 11


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Chapter 3 BULLION COINS AND NUMISMATIC COINS: THE DIFFERENCES A rather common misconception made about rare coins is exactly what is a numismatic coin. There are many people who believe that coins currently minted such as American Eagles, Canadian Maple Leafs and Chinese Pandas are "rare coins". In the case of the American Eagles some of the confusion arises from the fact that the obverse (front) of the coin takes its design from the St. Gaudens $20 gold coin that was minted from 1907 to 1932. Whereas the St. Gaudens is a coin sold on its numismatic merits, the American Eagle is sold primarily on its bullion content. Yet, to the novice, the two one ounce coins look alike due to the front design. In addition, promoters and telemarketers have presented coins such as the Chinese Panda as "rare coins" and other currently manufactured coins as "limited editions" furthering confusion as to what is a "rare coin". In this chapter, three categories will be discussed. The bullion coin, the numismatic coin and the semi-numismatic coin. BULLION COINS This is the easiest area to explain. Bullion coins are solely valued based on the amount and quality of the gold, silver or platinum contained in the coin. The coins are usually denominated in weights of 1/10 ounce, 1/4 ounce, 1/2 ounce and 1 ounce. The price is based on the "spot" price of gold, silver or platinum plus a premium for manufacturing by the issuing country and a commission to the selling dealer. Commissions are small; usually 2% to 6% of the selling price depending on the type of coin and the quantity purchased. While these coins are currently minted, they are not used as currency, although some coins display a denomination. For example, the 1 one ounce American Eagle shows a $50 denomination on the coin. Yet, the purchase price of this coin is presently $360.10 based on a "spot" price of gold at $349.20 an ounce (on August 8, 2003). There is no wisdom in spending this coin for its face value of $50.00. Bullion coins of the same size but from different sources vary in price due to the amount and quality of precious metal in the coin. Some countries have more hardening metals in their coins, such as nickel or copper, than coins from other countries. The price movement of bullion coins tracks the price of the metals market. The coin form is simply a convenient method of physically holding the asset. Coins are only one form of bullion, with ingots (from 1/4 ounce to 100 ounce) and bar (1 kilogram and up) as other common forms. In addition, many bullion coins are privately minted since they are not currency. Examples of private hallmarks are Johnson Matthey and Engelhard. All bullion coins are sold in the metals market using a bid-ask system that is quoted daily. NUMISMATIC COINS Numismatic coins are valued based on their collector value, rather than the intrinsic value of their weight. These coins are predominantly coins that were minted for use as currency. Due to the fact that many of these coins were used as intended, any supply of coins that exist in a virtually pristine condition is very small. The many worldwide collectors seek this small supply of coins, which establishes a classic supply/demand scenario. Unlike bullion coins, numismatic coins are not valued based on the amount of the precious metal contained but solely on the price that a willing buyer will pay for the coin in a open competitive bid system. This is much like the art market where paintings sell to the highest bidder; however, the rare coin market is more highly organized with established prices for coins that are independently published on a weekly basis, in addition to having a worldwide computerized bidding network (CCE). The coins are priced based on their individual characteristics, such as date, mint mark (the city where it was minted), type (such as one cent pieces, nickels, dimes, quarters, etc.), metal (copper, nickel, silver or gold), rarity and condition. Numismatic coins can be sold either by auction, through the wholesale network or privately. The table below provides a vivid example of value differences for a one ounce American Eagle bullion coin (based on spot price of gold of $349.20) and a 1913 $20 St. Gaudens (also containing approximately one ounce of gold). 13


Coin

Date

American Eagle $20 St. Gaudens $20 St. Gaudens

All 1913 1913

Composition

Condition

91.67% Gold 90.00% Gold 90.00% Gold

Any MS64 MS65

Population Price 8/8/03 3.6 Million 71 4

$ 360.10 $ 3500.00 $17,000.00

SEMI-NUMISMATIC COINS This category of coins is for numismatic gold and silver coins that are very common and priced with a dominant emphasis on the metal value of the coin rather than the collector value. These coins are either very common or in very poor condition or both. For example, a 1913 $20 St. Gaudens in a poor condition of "Fine -12", sells for only $390. This is slightly more than the price for the American Eagle which weighs 1 ounce. Common examples of such coins are low quality $20 U.S. gold pieces, common foreign gold (Russian 5 Rubles, German 20 Marks) and common silver coins usually traded in poor condition. "Junk silver" bags contain a face value of $1000 of silver coins than contain either 90% silver or 40% silver in their composition. The 90% silver sells for $3900 and the 40% bag sells for $1485 (based on silver spot at $5.02 per oz.) The semi-numismatic coins are popular for several reasons. When numismatic coin values increase rapidly, these coins historically tend to increase more than pure bullion coins. In addition, semi-numismatic coins are considered protected from bullion confiscation as occurred in 1933 in The United States. The premium paid for this added security is a small percentage over the price of a standard bullion coin. Semi-numismatic coins are only sold via wholesale outlets or privately, since there is no collector demand to make auction liquidation viable.

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Chapter 4 INDEPENDENT GRADING SERVICES Grading is the procedure by which the condition (grade) of a coin is determined. This is one of the most important elements in rare coin investing since the value of a coin is dependent on its grade. Simply, the higher the grade, the more valuable the coin. In the past, it was very important to have a dealer that was not only trustworthy but also skilled enough to accurately grade coins. Even having a well-known and reputable dealer wasn't enough in some cases. There were disagreements between experts as to the grade of a coin, in cases based solely on the personal preference or bias of individual dealers. In 1986, the controversy in grading intensified with a statement by the American Numismatic Association Certification Service (ANACS) advising the industry that they had changed their standards in grading coins. Out of the confusion that followed, many firms began coin grading services. From these developments emerged the Professional Coin Grading Service (PCGS) and their standardization of grades. Since 1986, PCGS has taken the position of the largest and most accepted independent grading service in the world. The Numismatic Guaranty Corporation of America (NGC) was formed six months after PCGS. Although a smaller service than PCGS, it also enjoys a wide industry acceptance. For the coin investor, it is important to know that only the prices of PCGS and NGC coins are reported on a weekly basis in the independent publication, the Certified Coin Dealer Newsletter (CCDN. Further, only PCGS and NGC have an established sight-unseen pricing market. That is, the price dealers will pay for a coin that is graded by one of these services without looking at the coin. Remember, certified coin prices are not interchangeable. The price of a MS65 coin graded by PCGS cannot be obtained by looking at the price of the same MS65 coin graded by NGC. There could be differences in values. The column for coin prices in the CCDN listing PCGS coins must only be used for PCGS coins. The same holds true with NGC coins. This is one of the main reasons that the typical investor should only hold PCGS or NGC coins in his portfolio. There are other independent grading firms, but due to their lack of impact among dealers and collectors, they are best left to the collector market who will buy the coin based on its merits rather than the certificate. Listed below are the major grading services and comments for investors.

Professional Coin Grading Service (PCGS). Newport Beach, CA. Currently considered the largest grading firm by the rare coin industry, with over 7,000,000 coins graded with value in excess of $9 billion. Prices are reported weekly in CCDN. The PCGS Population Report is published monthly detailing the grading results of newly submitted coins. (see Chapter 5 for details on the use of population reports)

Numismatic Guaranty Corporation (NGC). Parsippany, NJ. Recognized as the second largest grading firm by the coin industry with approximately 4,000,000 coins graded.. Popular with gold coin investors. Not recommended for buyers of copper coins due to fact they will not guarantee that the condition of copper coins will not deteriorate in their holder. Prices reported weekly in CCDN. The NGC Census is published quarterly detailing grading results.

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ANACS. Columbus, OH. The letters do not stand for anything. Formerly, they stood for the American Numismatic Association Certification Service. The American Numismatic Association sold the service to Amos Press in 1991, which now uses the same letters for its grading service. Prices are reported one a month in a supplement to CCDN. Numismatic Certification Institute (NCI). Dallas, TX. Established in 1985 and an affiliate of Heritage Capital Corporation. Currently not active. Grading standards are constant, based on standards set by ANACS prior to their change announcement. Prices reported once a month in a supplement to CCDN. International Numismatic Society (INS). Washington DC. One of the oldest grading services. Not highly regarded in dealer and collector market places. Grading is viewed as rather liberal and somewhat inconsistent at times. Prices reported monthly in supplement to CCDN. Photo-Certified Institute (PCI). Chattanooga, TN. PCI acquired another short-lived grading service, Hallmark and combined operations. Not a major player in grading with the industry. One of the cheapest services to use, however, not utilized by most major dealers. Prices reported monthly in CCDN. Independent Coin Grading Company (ICG). Englewood, CO. ICG debuted in July 1998. Key feature is all coins are sent to service through a certified public accounting firm, which is touted to eliminate any bias based on the identity of the submitting firm. Sovereign Entity Grading Service, Inc. (SEGC). Lookout Mountain, GA. Also debuted in July 1998. Encapsulated slabs are color-coded based on metal composition. In addition, slabs have top viewing labels for ease of selecting coins when stacked. The above are the main grading services. There were many others, such as CompuGrade, Exactagrade, AccuGrade and others. However, prices have not been established for such graded coins, and the investor is well advised to avoid these coins. Many telemarketers sell coins that have been graded by these services but price them according to the PCGS values in the CCDN. This is improper and deceptive according to the Federal Trade Commission. The main point for you, the financial advisor is simply this. It is best only to deal with coins that are graded by either PCGS or NGC. This will provide your client with the most accepted and therefore most liquid form of this investment asset.

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Chapter 5 POPULATION REPORTS AND THEIR USE Population reports are a data source of how many coins have been graded by an independent grading service. The concept and use of population reports began in August 1986 with the first PCGS Population Report. Numismatic Guaranty Corporation (NGC) began their reports in 1988 and ANACS began their reports in June 1991. PCGS and NGC reports are published monthly and ANACS publishes their report semi-annually at present. The number of coins each service has graded is as follows: PCGS has graded almost 7,000,000 coins and NGC has graded approximately 4,000,000 coins as of December 2002. ANACS has graded approximately 600,000 coins as of December 2002. Coins graded by ANACS with photo certificates from 1972 to 1990 are not included in that figure. This is due to the fact that ANACS was sold in 1991 to Amos Publishing which used "ANACS" as the name of the grading service but is a different grading entity than the ANACS that existed from 1972 to 1980. During that period, ANACS were the initials for American Numismatic Association Certification Service. Population reports provide information on the number of coins graded by a service and the results of the grading by listing the type, date, mintmark and grade of the coin in a numerical column format. It is important to note that the individual grading services determination and standards for grades are not interchangeable. A coin graded as MS65 by ANACS may be graded as MS64 or MS66 by another grading service or vice-versa. This is why the pricing sources list different values for each of the coins graded by each service. The population reports serve a valuable tool for the financial planner. Prior to these reports, the number of rare coins existing was, at best, an educated guess based on factors such as number of appearances that certain coins would have at auctions, or the difficulty or ease in finding certain coins at shows or in the wholesale marketplace. The buyer, unless he was an expert himself, was totally dependent on the seller on the accuracy of information concerning the scarcity of the coin. Now, with the population reports, a reasonable measure of rarity can be established. There are some important guidelines and caveats to the use of these reports. 1. Most importantly, the rarity or population of a coin is only one element for determining its value. Rarity alone is not a basis for establishing price. Newer grading services will have lower population report figures simply because fewer coins have been submitted to them. For this, PCGS and NGC coins should be considered first. 2. The PCGS Population Reports are considered to be the dominant data source since it has graded three times the number of coins of NGC. Coins that may have a low population in NGC or ANACS may have a much higher population as a PCGS certified coin. In truly rare coins, the total existing population of the coin in NGC and PCGS will be apparent. 3. When looking at the population of a rare coin, the main question becomes "What is rare?" The answer is lengthy but not complex. It depends on the coin series. Simply, coins must be measured against other coins in its' series, for example, the rarity of a certain Morgan silver dollar should be looked at in relationship to the rest of the Morgan silver dollars. This is done in two ways as the following example of a 1910-S $20 St. Gaudens gold piece in MS65 condition as graded by PCGS illustrates. 17


A. How does the rarity of the coin in the subject grade, MS65 for example, compare to the number of other MS65s in the series ($20 St. Gaudens). By looking at the report, one can easily see how many MS65 graded coins exist in total for the entire series as well as how many exist in individual dated coins. If there are 9943 $20 St Gaudens in total graded as MS65, with the highest population of a specific date coin (in this case a 1924-P) in the series being 3642 and the 1910S has a population of only 6, it is evident that the 1910-S is a scarce coin for the series. B. How does the rarity of the 1910-S $20 St. Gaudens in the subject grade compare to itself in higher grades. In MS65 there are only 6 1910-S $20 St. Gaudens. There is one coin of this date graded higher and that is a MS66. The population is reported as 6/1. The number after the backslash is the total number of coins in all grades higher for that specific date coin. If there was a MS66 and an MS67 that existed, the correct report would be 6/2. Reviewing this coin in NGC, there are 6212 MS65 $20 St. Gaudens graded with the population of this 1910-S $20 St. Gaudens being 39/1. 4. Population reports change. New coins are added to the tally as they are graded. Other coins are resubmitted and in some cases regraded higher or lower. This will cause the reports to fluctuate in population as the new grading certificate is recorded and the old grading certificate is deleted. 5. Estimates vary as to the percentage of rare coins that have been certified. Some experts state that as many as 70% of existing coins have been certified. One method of determination is the number of monthly submissions to the services. They have declined on a monthly basis since the inception. A graph of numbers of coins submitted would look like a classic bell curve. A sustained increase followed by a plateau then a constant decrease. 6. Low populations and high grades for modern U.S. coins, those minted after 1950, are generally of no consequence or importance due to the very low values. 7. ANACS is used primarily by collectors seeking to grade esoteric varieties of coins such as errors, rotated dies, doubled dies and other unique oddities. The key point for the financial advisor is that population reports are one tool to provide the client justification of rarity by and independent, third party organization. Used with the Certified Coin Dealer Newsletter the validation of price can be determined.

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Chapter 6 RARE COINS IN FINANCIAL PLANNING APPLICATIONS Rare coins have been predominantly a collector-based activity for generations. Although history has shown rare coin collecting to be a highly valued activity, which has reaped participants strong profits, it was not until the late 1970's that it "crossed-over" into the investment arena. In the high inflation period from 1979 to 1981, tangible assets, and rare coins in particular, dazzled financial advisors and their clients with astounding performance. Rare coins provided a physical asset with an identifiable history, numismatic artistry as well as potential for profit. In 1979, the investment community discovered what collectors had known all along: coins were a serious store of value. From 1979 to 1989, rare coins were assets that more than held their own against traditional investments, such as stocks, bonds and mutual funds. In 1988, Wall Street began a major movement into the rare coin arena with several coin limited partnerships underwritten by large, well-known brokerage firms. The collapse in 1990 of those efforts in part due by the greed and ineptness of the promoters,and in part to the recession caused by the Gulf War ended a magnificent run for this asset. Or did it? Mutual funds (go-go funds as they were called in the 60's) crashed dramatically in the early 1970's. The "Nifty-Fifty" lost over 80% of their value. The Morgan Guaranty Pension Fund, at the time one of the largest, lost over 75% of its value during the same period. In the present, mutual funds are lagging and investors have seen a collapse in tech stocks and “dot coms�, yet the S&P 500; the DJIA and the NASDAQ index are near all time highs. All investments are cyclical. They rise and they fall. Rare coins are no different as a financial asset. The simple principle of supply and demand is the main factor in its performance. Presently, coins are very active in many sectors of the numismatic market. In the past four years, single coins have eclipsed the million-dollar mark several times. The 1913 Liberty Nickel and the 1804 Dollar had those honors as well as the 1933 St. Gaudens $20. Heritage Rare Coin Galleries set the Guinness World record for the largest private sale of rare coins with the purchase of the Ed Trompeter collection for the sum of $15.1 million. Rare coins will again have a market resurgence, just as the funds of the 60's are having their current upturn. With this in mind, the use of rare coins in a financial planning role should be examined. I emphasize the word planning. It takes no courage or genius to buy an asset when it has already performed and is a "hot" investment. This is known as buying at the top. This is when financial planning is not the issue, but product selling and consumer gratification is the rule.The use of rare coins as a planning tool has many applications to different types of investors. Some examples are: MATURING CERTIFICATE OF DEPOSIT OWNERS: Rare coins offer a "hard asset" alternative to traditional paper assets. Many CD owners with several certificates find that it is suitable to diversify a portion of these proceeds into a tangible asset. INDIVIDUALS AGE 50+ PREPARING FOR RETIREMENT: Many mature clients are heavily invested in paper assets, and are looking for an alternative investment hedge in the event of a sustained steep market correction or high inflation levels in the future. INDIVIDUALS AGE 30 TO 50 BEGINNING LONG-TERM ACCUMULATIONS: Rare U.S. coins have a long-term history of performance and may provide an excellent vehicle for diversification in growth portfolios. A recent independent study by Dr. Raymond Lombra, Pennsylvania State University has shown that the highest performing assets over the period 1974 to 1998 have been stocks and rare U.S. coins. This study is discussed in detail in Chapter 7. 19


TRUSTS LOOKING FOR LONG TERM GROWTH: Rare U.S. coins are outstanding for some trusts, providing potential long term growth, ease of evaluation, liquidity, and privacy. Rare coins can be used in net income make-up unitrusts (commonly called "NIMCRUTS"). Assets in this type trust are not required to be income producing at all times. Some funds may be placed in appreciating assets that can be easily liquidated when needed to transform into income producing assets. In addition, rare coins are unique investments that preserve history and are environmentally and politically correct. Rare U.S. coins enjoy status as a recognized and liquid asset worldwide. QUALIFIED DEFINED BENEFIT PENSION PLANS: Although rare coins (and other collectibles) were restricted from IRA's and individually-directed pension accounts by The Economic Recovery Tax Act of 1981 (ERTA), certified rare U.S. coins can be placed in defined benefit plans without restriction. This provides another asset class diversification strategy to the investment plan. Consult with a tax advisor to ensure the pension plan conforms to eligibility requirements before proceeding. Presently, , S.935 and H.R..1820, are awaiting action in Congress to restore the right to add rare U.S. coins to IRAs. INDIVIDUALS LOOKING TO GIFT ASSETS AND ELIMINATE INCOME TAXES: As a result of The Tax Reform Act of 1986, there was a change in how individuals may make tax effective gifts to minors. Prior to TRA '86 the donor could reduce his income tax liability and reduce the size of his estate by gifting assets to minor children. Any income generated by the gift would be taxed at the child's lower rate. Also the individual's estate on death was reduced by the gift provided the donor did not die within a two-year period following the gift. The effect of TRA '86 was to simply allow the reduction of the net death estate by the use of gifting. However, the income stream from these gifts is still taxed at the donor's maximum rate. Since rare coins produce no current income or yield, the tax impact for donors is greatly reduced when rare coins are used in gifts for minors. GOLD OR SILVER BULLION OWNERS LOOKING TO EXCHANGE ASSETS: Many holders of physical bullion are looking to increase the growth potential of their hard asset portfolio. By converting all or part of their existing bullion holdings into rare U.S. coin portfolios, they can take advantage of a much higher historical rate of return. The performance chart illustrates the long-term results between gold bullion and rare U.S. gold coins. These are but a few of the applications in which rare coins can be utilized. It is recommended that you consult a tax advisor that has experience in dealing with rare coin investments before initiating any action. Unfortunately, many financial planners have little if any knowledge about hard asset diversification, but there are those who are proficient in this area. A very worthwhile professional financial advisor is one who can properly assist his clients in determining the suitability of rare coins to their portfolio. Rare coins should only be a part of an overall financial plan. The recommended amount is usually 5%-15% of the total investment portfolio (excluding value of home, autos and illiquid assets such as long-term leases). As with any investment, rare coins may not be suitable for all clients. But for those clients who are fortunate to be able to include them in their asset mix, it is an investment that provides history and beauty as well as potential growth.

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Chapter 7 PENN STATE UNIVERSITY RARE U.S. COIN AND GOLD STUDY In 1995, a study done at Pennsylvania State University for the Coalition of Equitable Taxation was presented to Congress on the use of rare U.S. coins and gold in IRAs. Major findings included these statements: 路 "A detailed analysis of hypothetical portfolios reveals that over the 1974-1993 period a portfolio consisting of 5% rare U.S. coins, 5% gold and the rest stocks, Treasury bonds and Treasury bills would have increased portfolio returns at the same time that it decreased overall portfolio risk. Given the turbulent economic conditions encompassed by the period, such and outcome is remarkable, suggesting that holding 5-10% of an IDRA (individually directed retirement account) in gold and rare U.S. coins is both warranted and prudent. 路 Measures of risk and returns aside, legitimate concerns about liquidity and safety is examined. Drawing on extensive evidence pointing to documented improvements in the markets for precious metals and rare U.S. coins (particularly those improving the information available to market participants), the practices and protections were judged to equal or better than those found in the markets for a variety of investments allowed within IDRAs under current law. 路 The notion that allowing gold bullion and rare U.S. coins in IDRAs would prove "unproductive", in the sense that diverting funds from "productive " uses is carefully considered. Since rare U.S. coins and gold bullion within portfolios are not consumed, but represent savings, their acquisition can improve saving at the margin and therefore augment the pool of funds available to finance growth enhancing investment spending. How precisely a dollar enters the pool is largely irrelevant. Since widening the range of choices within IDRAs encourages broader participation and thus increases savings, and since precious metals and rare U.S. coins improve the investment performance of IDRAs, discriminating against such investment options is counterproductive and especially unwarranted in a nation experiencing a significant savings shortfall." An update of the report was commissioned by U.S. Tangible Investment Corporation in 1999 and conducted, by Dr. Raymond Lombra, author of the original study. It found that the additional data for the 1995 to the 1998 period favored rare U.S. coins over gold bullion. The strong performance of the stock market from 1995 to 1999 resulted in stocks having a higher standard deviation due to the dramatic upward movement of stocks. It was during this period that approximately $500 billion was injected into the U.S. stock market, which was equal to the amount invested in the stockmarket from 1924 to 1995. Rare U.S. coins in this period performed very much like gold bullion; they lowered the volatility of the portfolios. However, coins, unlike gold bullion, maintained the portfolio returns rather than dramatically lowering them as one would expect. The diversification percentage that was most effective during the 1994-1998 period was 5% to 10%. Gold bullion lowered the volatility as well but at the expense of overall returns. The new studies measured the deviation in five-year increments from 1974 to 1998. In addition, the baseline portfolios were also adjusted to reflect higher percentages of stock holdings in the 1994-1998 period and lower stock holdings in 1975 to 1979. Adjustments were also made to reflect portfolio holding variations for the remaining periods. In periods where coins had extremely strong performance, the addition of coins to the baseline portfolio had a dramatic effect in increasing the return but expectedly increased the volatility. The following charts illustrate the average return of the measured indices in this study for the period 1978 to 2002. 21


1978– 2002, Average Annual % Returns Stocks Treasury Bonds Gold Bullion Coins (all types- MS65) Coins (Gold Type-MS63-65)

22

12.8% 10.6% 3.1% 14.3% 11.9%


23


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Chapter 8 RARE COINS IN RETIREMENT PLANS In the years prior to December 31, 1981 there was no restriction on the inclusion of collectibles in qualified plans and IRAs. Items such as art, rare wine, stamps, antiques and rare coins were commonly used as alternative investments in retirement plans. Remember, in those years inflation was in the double-digit range, equity investments were returning 5% to 6% and tax brackets were in the 40% range. From 1978 to 1981, all tangible classes were experiencing a "boom" period much like the stock market is today. The use of tangibles as an investment was a proven success. With the passage of The Economic Recovery Tax Act of 1981 (ERTA), the use of collectibles as an asset permitted in IRAs and individually-directed account was amended. §408 of the Code had a new subsection (m), which stated: The acquisition by an individual retirement account or by an individually directed account under a plan described in §401(a) of any collectible shall be treated ...as a distribution from such account in an amount equal to the cost to such account of such collectible. Why was this enacted? The brief paragraph above was included in a 3000 page document two days before the scheduled vote in Congress. Many legislators did not know this provision was included in the bill. It was not a MAJOR issue that was discussed or debated. The rare coin industry, as well as other tangible asset firms, was caught totally unaware by this new provision. It was this particular Act that caused the formation of the Industry Council of Tangible Assets (ICTA) the first lobby organization for firms specializing in tangible assets. Types of Qualified Retirement Plans There are two main categories of deferred compensation and retirement plans; qualified and non-qualified. In discussing the use of rare coins in retirement plans only qualified plans and IRAs will be reviewed. IRAs are governed by §408 of the Internal Revenue Code and are not treated as qualified plans by the Code but will be discussed as to their use with rare coins. Qualified plans are described in §401(a) of the Internal Revenue Code and are divided into two main types: defined benefit and defined contribution plans. A defined contribution plan is one "which provides for an individual account for each participant" (§414(i) and a defined benefit plan is "any plan which is not a defined contribution plan" (§414(j)). The defined contribution and defined benefit labels apply to both corporate and self-employed qualified retirement plans. Self -employed retirement plans are commonly referred to as H.R. 10 or Keogh plans. The most common forms of defined contribution plans are the profit sharing, §401(k), stock bonus, target benefit ESOP and money purchase plans. All of these plans provide for individual accounts for each plan participant.A defined benefit plan may also be of either the Keogh or corporate variety but they do not provide for individual accounts for any participant. The services of a pension actuary are required with these plans. In addition, these plans may be subject to regulation by the Pension Benefit Guaranty Corporation.

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Investment Guidelines for Retirement Plans The plan trustee is responsible for the investment and administration of property in retirement plans. As stated in Pension and Profit Sharing Plans, §15.08[1]: "There are no specific legal limits as to what the trustee may invest in under the trust. The limitations are the same [for Keogh plans] as those for any qualified plan covered by the fiduciary standards of ERISA. Among these are: 1. A duty to diversify investments in order to minimize loss unless this is clearly imprudent; and 2. The statutory prudent man rule governing the general conduct of the trustee. Also, as stated on the CCH Pension Plan Guide, 9431: " The Internal Revenue Code does not restrict the form of investment that may be chosen by the trustees." In the November 1999 issue of the Journal of Financial Planning, the 1994 National Conference of Commissioners on State Laws model statute incorporating the principles of the Uniform Prudent Investor Act (UPIA) Restatement (Third) of Trusts was reviewed. In brief, the UPIA fundamentally changed trust investment law, emphasizing the portfolio as a whole and the interplay between risk and reward. Of interest is the fact that there is no particular investment that is inherently prudent or imprudent. The premise is now, that trust beneficiaries are better protected by increasing the trustee's responsibilities and powers than per se restrictions on safe harbors. Amendments of the Code since 1965 has established those individual principals of the business enterprise have the right to administer their corporate and Keogh plans. The plan trustee is responsible for the investment of the plan assets. It is important to note that defined contribution plans, but not defined benefit plans, can permit plan participants to direct and control the investments of the individual accounts under the plan. Without such permission in the defined contribution plan, the participants have no such right and the control of the investments in the plan remains with the trustee. As stated earlier, there is no regulation on the types of investments the trustee can make as long as the prudent man rule and diversification requirement is met. Regulations on Collectibles in Retirement Plans Prior to the passage of the Economic Recovery Tax Act of 1981 (ERTA), collectibles were routinely allowed as assets for all retirement plans. Rare coins, stamps, rare wine, collectible automobiles and art were accepted as plan assets for all qualified plans and IRAs. Effective December 31, 1981 ERTA added §408(m), which states: "The acquisition by an individual retirement account or by an individually directed account under a plan described in §401(a) of any collectible shall be treated as a distribution from such account in an amount equal to the cost to such account of such collectible" Collectibles are defined to include art, coins, stamps, rugs, antiques, metals, gems and alcoholic beverages. The two major points of this ruling are: · the provision applies ONLY to IRA's and individually directed accounts under qualified (§401(a)) plans · the statute does not forbid the acquisition of a collectible but only provides that if a collectible is acquired it will be treated as a distribution to the account holder.

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Collectibles that were acquired prior to December 31, 1981 in individually directed retirement plans and IRAs are still eligible assets, however, additional collectibles may not be added to those plans. If the collectibles within the plan are sold, they may not be replaced with new collectibles. For example, if an IRA has rare coins within its holdings the existing coins may not be sold and replaced with new coins. The acquisition of title of the new coins is after December 31, 1981 and will be deemed as a taxable distribution to the account holder. However, the rare coins held within a plan may be certified by a grading service as this is simply administering the plan assets. There have been two major changes to the Code with regard to collectibles. The Tax Reform Act of 1986 allowed the acquisition of American Eagle gold and silver coins by IRA's without negative tax consequence. Taxpayer Relief Act of 1997 authorized the investment in any gold, silver, platinum or palladium bars and legal tender coins of the specifications used by a commodities contract market and American Eagle bullion coins. Specifically, the latest change means that all foreign bars and coins must be at least .995+ fine or more to qualify. Further, it clearly states that the physical metal must be held in the possession of a trustee rather than by the owner of the IRA. Rare Coins in IRAs IRA's are subject to §408(m) and with exceptions as noted previously, will have any acquisitions of collectibles treated as a taxable distribution. Rare Coins in Defined Benefit Plans Defined benefit plans by clear definition do not provide for individual accounts (Code §414(j)) and therefore are not subject to §408(m) under any circumstances. Defined benefit plans may acquire collectibles without any regard to §408(m). The IRS position is given in Prop. Reg §1.408-10(c) which states: "for purposes of this section, the term "individually directed account" means an account under a plan that provides for individual accounts and that has the effect of permitting a plan participant to invest or control the manner in which the account will be invested." To have an individually directed account within contemplation of §408(m), there must first be a qualified plan, which provides for individual accounts. By law, defined benefit plans (both corporate and Keogh) cannot provide individual accounts and cannot be subject to the provision. Rare Coins in Defined Contribution Plans The key issue in the question is the matter of individually directed accounts. Defined contribution plans are subject to §408(m) only if they contain provisions allowing a participant in his capacity as such to direct the investment of his individual account. However, if the plan does not grant authority to the individual to direct investments in his account but instead gives authority to plan trustees, an investment committee (who are non-participants in the plan) or administrators, then §408(m) does not apply. There is opinion that a one-man corporation or one-man business can set up a qualified plan where the business owner is the only employee, the only participant and the only trustee and acquire rare coins without adverse effect from §408(m). The position is that the plan provides all authority to direct investments to the trustee and specifically does not provide investment direction to the participant. Existing defined contribution Keogh plans can be amended to allow rare coins by deleting the participant directed investment provisions and changing the trustee to the business owner rather than retaining the institutional trustee.

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It is very important to note that all taxpayers who maintain any form of qualified retirement plan make contributions in cash rather than in non-cash property. In Commissioner v. Keystone Consolidated Industries, Inc the court held that contributions of real estate and business property to its defined benefit pension plan were prohibited transactions in violation of ยง4975 of the Code. The methodology in acquiring rare coins is with purchases by the retirement plan account rather than contributing existing rare coin portfolios to the plan. It is strongly expressed that no one should rely on any of the principles or techniques discussed in this chapter without specific advice from a qualified tax professional. EDITORS NOTE: As of August 2003, legislation is pending that would restore the right of individuals to place certified coins in Individual Retirement Accounts. Identical bills, S.935 and H.R..1820, are awaiting action in Congress. According to Diane Piret, director of industry affairs for the Industry Council for Tangible Assets, the bills seek to restore the option for consumers to include certified coins in lRAs. The Economic Recovery Act of 1981 removed that option, Piret said. Twenty-one states exempt coins and precious metals from sales tax because they are recognized as investment products. Just as investors in financial products access the marketplace via their stockbroker, investors in rare coins access the online trading market via their member coin dealers. Trades are entered on these electronic networks in a similar manner as trades are entered on NASDAQ, with confirmation provided by the trading exchange.

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Chapter 9 HOW TO PROTECT YOUR (AND YOUR CLIENTS) ASSETS: TIPS ON PREVENTING FRAUD LOSS The following are tips for the financial advisor to provide to his clients who may be contacted directly by coin promoters. Many financial advisors also may be contacted if they have ever purchased a coin for themselves from a direct marketer or sold rare coins to their clients in the past. 1. If you are solicited without action from you, beware. Many people are being contacted by telemarketers and direct marketers. Your first question should be "How did you get my name?" Most telemarketers buy lists. If you have purchased any coins or other investments, you should make sure that your name may not be sold as a part of a mailing list. 2. Ask how long the firm has been in business. Beware of a response like "Our firm has combined experience totaling 30 years." It simply means that they may have 30 representatives, all with 1-year experience in the market or two principals each with 15 years experience. Ask what year the firm was established, in which state are they incorporated, and for the information on the firm and key principals to be mailed to you before you discuss anything further. 3. The most important element in your dealings is to receive material from the soliciting firm in the U.S. Mail. Many fraudulent firms, under the guise of urgency, will insist on using Federal Express, UPS Next Day or Airborne Express. The real reason is that if they do not use the U.S. Mail, they cannot be indicted for mail fraud by the U.S. Government, but instead are subject to prosecution in civil court with private parties. Always insist that preliminary information be sent via U.S. Mail and check to see the return address on the envelope and on the letterhead is from a bonafide firm with an address other than a maildrop or private mail box.. 4. When dealing with a telemarketer, you should always check with the Consumer Protection agency in the state of the soliciting firm to establish if there are any complaints. The Better Business Bureau and Dun and Bradstreet simply report data to the public that the firm itself has provided. It is better to find a firm with a history or "track record" than a firm that shows no history. 5. You will be offered to buy something, usually on a "risk free" basis, requiring you to provide a credit card number as a security for the item they will send "on approval". DO NOT GIVE A CREDIT CARD NUMBER TO A TELEMARKETER IF THE TELEMARKETER INITIATED THE CONTACT WITHOUT ANY ACTION FROM YOU. You may find unauthorized charges on your card that will be very time consuming to remove. 6. In coin purchases, there are several general rules to follow: a. Buy only U.S. coins, dated prior to 1934 b. Buy only coins certified by PCGS or NGC. c. All PCGS and NCG coins should be priced according to the weekly Certified Coin Dealer Newsletter. Know what the formula is that the dealer used to arrive at the price. 29


d. Buy coins that are graded at least MS63 or PR63. e. "Buyback" guarantees are only good as the company. The longer a firm has been in business, the bet ter odds that the firm will honor their commitment. "Buyback" should only refer to repurchase at the prevailing market prices. f. DO NOT buy coins based on performance guarantees. That is," these coins will go up in value 250% in a year...buy now!!". In such case, why would anyone sell them to you? g. Beware of firms offering "free auction service". It does not exist. The selling firm may not charge you, but the auction firm will. This cost is passed on to you and the selling firm can still claim it did not charge you for auction service, the auction firm did! h. Some firms offer retail consignment as a method of liquidation for coins. This is commonly used in "Ponzi" schemes where the promoter internalizes the sale at prices higher than the actual market. To have consignment a viable option, the seller should be advised of the time limit required for sale, the amount of the sale, the percentage that will be retained as a fee and comparative prices for wholesale and auction estimates. i. If a firm promotes the performance of coins using the Salomon Brothers investment survey, ignore them. The survey was last produced with coins in 1989. j. Beware of PCGS or NCG certified coins in low grades (MS62 or PR62 or lower) with low populations and very high prices. k. Finally, DO NOT become involved in multi-level marketing (MLMs) schemes in rare coins. They do NOT work and will cost you money. 7. Financial planners may be solicited from purchased sales lists of defunct companies that previously marketed to advisors. If you are being asked to promote rare coins to your clients, ask if the coin firm has been reviewed by your brokerdealer firm. If they do not know what a broker-dealer firm is or if they advise that it is not necessary because "coins are not a security" hang up the phone. These are just the basics to prevent becoming victimized in a fraud. Rare coins have long been an important part of diversified holdings. This historical asset can also be a viable part of any investment portfolio. The rare coin market has excellent legitimate opportunities. Look for them and proceed as with any other purchase, with knowledge and care.

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Chapter 10 RARE COIN INVESTMENTS AND FINANCIAL ADVISORS: A 25 YEAR PERSPECTIVE The use of rare coins in financial planning as an alternate investment vehicle has been experimented with for several years. The high-inflation period of the late 1970's was the actual "coming out party" for this often discussed tangible asset. From 1978 to 1989 the widely promoted Salomon Brothers investment survey enhanced the appeal of rare coins by virtue of its constant appearance as a "#1 ranked investment" somewhere in the survey periods, whether it was the 5 year, 10 year or 15 year records of the investment. From 1988 to 1990, Wall Street made several forays into rare coins, notably the Kidder-Peabody American Rare Coin Fund L.P. and the Merrill Lynch NFA Coin Fund driving rare coin prices to record levels. The most successful partnership in history was the New England Rare Coin Fund formed in 1977 with an initial investment of $350,000. In 2 years the partnership returned over $2,000,000 to their investors. However, in spite of the history of success in this asset class the financial planning community (by in large) has not ventured into rare coin investments. Why? There are several reasons. First, it is an unregulated and unlicensed area. The majority of planners simply do not understand rare coins nor are they willing to take the initiative to learn. Financial advisors must study for their insurance license, for their securities licenses, their health license, and for their CFP, ChFC or CLU designations. To maintain these designations they are required to complete various continuing education courses. They must keep abreast of the many changes in regulations and procedures in the planning industry and how it effects their practices. When the advisor is approached with an investment program that has no license and is suitable for only a 10% -15% portion of their client's portfolio there is no incentive to take time to learn about the asset. The advisor is not going to risk the acceptance of his proposal which typically include mutual funds, insurance products or limited partnerships for the sake of placing 10% of the portfolio into something he can't fully explain to his client. With mutual funds, the planner stays in the mainstream of the client's expectations and doesn't risk losing the entire proposal. To the financial planner, it seems not to be worth the trouble to take on additional research for a further method of diversification. As a result, coin promoters who have no concern for the client's financial plan make the majority of coin investment sales direct to the public. Second, there has been abuse in the rare coin area. Money has been lost, planners have been sued and some coin firms have been forced out of business for unethical practices. Interestingly, the loss of money in rare coin scams have paled in comparison to the losses involved in real estate, oil and gas and insurance swindles, not withstanding the losses due to economic reversals. However, legitimate rare coin companies take the brunt of the criticism simply because they are the ones who have survived and remain to service the coin industry. There have been abuse but that fact alone is not reason to indict an entire industry. If that is the case and planners avoid rare coins because "people have lost money", then planners should not sell real estate LP's, stocks, bonds or mutual funds for the same reason. Third, few Broker-Dealers have "approved" rare coins for their product list. The first reason above (explanation therein) is a contributing factor. A Broker-Dealer as a profit-oriented entity simply does not feel it would make the money in rare coin sales as it would with traditional investment products. Very few Broker-Dealers know how to perform due diligence on rare coin firms. This is partially the fault of the rare coin industry in failing to attempt to educate the segment of the financial planning community that could eliminate the feared "abuses" in rare coin investing. The illogic in establishing a relationship with Broker-Dealers is that in its normal and correct form, rare coins are not a security. It is a retail product. It is this fact that allowed the rare coin "shills" in the past to promote the investment by advising a planner he could sell rare coins without his Broker-Dealers approval nor have to split commissions with the Broker-Dealer. In fact, many coin promoters used this reasoning simply to avoid the scrutiny of even a cursory due diligence review by a B-D. However, the fact that coins are not a security does not absolve the financial planner from notifying his Broker Dealer that he is offering such product to clients. NASD 3030 requires that notification be made to the NASD member firm of outside selling activity. (Chapter 14 examines these regulations in detail). 31


Finally, there has been no real effort by coin firms to solicit Broker-Dealers. The coin industry is comprised of retailers. Their objective is to sell coins. They are not interested in fiduciary relationships, suitability of investments or investment goals. Coin dealers sell coins. They do not want to become encumbered with planner commissions, dealer incentive programs, developing marketing materials for planners or standing around at financial planning conventions. Coin dealers sell coins. As you are reading this, there are coin salespersons calling, writing and talking to clients of financial planners, stockbrokers and insurance persons. Coin dealers consider the financial planner to be a competitor since they sell other products besides coins. If you read the mass direct mailings, listen to the telemarketer's pitch or watch the "paid commercial" television program on how to invest in rare coins, you will notice that the financial planning industry is omitted in these presentations. Coin retailers want to sell coins to the public and without financial planners filtering any information. The lack of relationship also lies with the Broker-Dealer community. The majority of compliance officers are equity-based in their knowledge. Any products, including rare coins, outside their comfort zone of information are not seriously considered until the product becomes a "hot" commodity that is requested by their client base. Some Broker-Dealers are accustomed to the "deep pockets" of mutual fund companies and insurance companies underwriting the costs of Broker Dealer conferences to expose these product suppliers to the top representatives of the firm, who in turn, sell these products to their clients. Costs to product suppliers to attend these conferences range from $5,000 to $40,000 per firm. Mutual fund companies, which receive millions of dollars per week in sales through Broker Dealers, find these costs acceptable. Rare coin firms, which deal with what is a minor position product, do not have the resources to participate in such conferences. Rare coin firms normally receive sales direct from the public. The additional costs to receive sales through Broker Dealers that do not actively promote rare coins are viewed as prohibitive. Whether or not a financial planner believes in rare coins as an investment product, it is his or her responsibility to provide information to clients on the suitability and mechanics of investment products, including rare coins. The following are the key points of rare coin investments and some of the pitfalls to avoid. 路 What is the purpose of the investment? Rare coins are a true asset class diversification vehicle, which has historically shown contra-cyclical performance when compared to traditional equity investments. As a long-term investment it has an outstanding record as a growth vehicle. According to independent academic studies, rare U.S. coins and stocks has been the top performing investments over the past 25 years. It is NOT an investment that should be considered for clients with current income needs from all of their investment assets. 路 How much should a client invest? Three factors are used for computation: total growth assets available (excluding residence, automobiles and long-term non-liquid equities such as some limited real estate partnerships), percent investment comfort factor (usually 5% to 10%) and the minimum investment required. Example: Client "A" has $10,000 in growth assets, wants to invest 10% and the minimum investment required is $5,000. In this case, the client can invest $1,000 according to the formula. This client should stick with a mutual fund or increase the investment level to 50%, (which is not recommended). Client "B" has $200,000 in growth assets, wants to invest 10% and the minimum investment is $5,000. In this case, the client can invest $20,000, which is well over the minimum investment requirement. 路 Who determines the minimum investment? The seller determines the minimum investment. A good rule of thumb is this: the smaller the minimum investment the longer the holding period. Generally speaking, if a client cannot invest at least $5000, equities would be a more suitable investment.

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· What type of coins should a client buy? The rules for investors are specific. Only U.S. rare coins that are dated pre-1934, graded in the condition of Mint State (MS) or Proof (PR) 63 to 67 and certified by either the Professional Coin Grading Service (PCGS) or by the Numismatic Guaranty Corporation (NGC). These coins trade "sight-unseen" among the largest network of coin dealers on an electronic exchange called the Certified Coin Exchange (CCE). The prices for these coins are the only ones that are listed weekly in an independent price sheet called the Certified Coin Dealer Newsletter. 90% of the worldwide market in numismatics is based in United States coins making it the largest sector of this market. · What about buying foreign coins? Frankly, they are more attractive as a hobby than as an investment. There are exceptions as always, but pricing is difficult, the market is small and certification is not as prevalent in foreign coins. The same holds true for ancient coins and currency. · How much should a client pay for coins? The standard industry mark-up is 25%-30% over the wholesale price. This includes commissions to the planner. Some dealers will charge less. However, examination will reveal the "less" is the commission normally paid to a planner or Broker-Dealer. Further, lesser markups also mean lesser services to the client. This is similar to the differences between a full service broker and a discount broker. The load of the program also needs to be compared to the wholesale buyback provisions offered by the seller, as well as other liquidation options. · If I am a registered representative, must I tell my Broker-Dealer I'm selling rare coins? According to current NASD rulings, yes. Each Broker-Dealer has different policies regarding rare coin sales. The main issue is not whether or not coins are a security, but the issue of compensation (NASD Code 3030). If the representative receives a commission or fee, then notification by RR/IA's to their NASD member firm may be required under Article III, Section 43 of the NASD Rules of Fair Practice. · What if I'm not licensed to sell securities; can I sell rare coins? Yes. But for your own protection conduct your own due diligence and keep a written file of your investigation and all materials pertaining to the firm. Ask for current financial statements, preferably from large, nationally recognized, independent accounting firms. Check into pricing formulas for coins, certification sources, length of time in business, liquidation options, types of coins to be provided to investors and evaluation services. In addition ask about other approved broker-dealers and membership status with financial planning associations such as the IARFC, NAIFA, NAPFA or FPA. . Also, check credentials of principals in the coin field and membership status in coin industry organizations such as the American Numismatic Association (ANA), the Professional Numismatists Guild (PNG), the Industry Council on Tangible Assets (ICTA), PCGS and NGC. One other thing. Commissions. If they get higher than normal (10% is the maximum) the financial advisor is making money, the coin company is making money but the client is sucking swamp water. Think about it. These are some of the points that can help the planner understand rare coins. It should be obvious that there is much more involved and more to learn. But it is not difficult. It only takes a commitment of time to learn. The financial advisor should seek a relationship with a rare coin wholesaler experienced in dealing with the financial planning marketplace who will provide a teaching environment as well as a selling opportunity. Before attempting to place rare coins in a clients' portfolio, a financial advisors should be as comfortable with their recommendation as with a mutual fund or an annuity. Rare coins are a legitimate investment providing the benefit of true asset class diversification. Once an advisor begins to investigate coins as an investment option, their importance in the overall financial plan will become apparent, as well as the fact that coins are easier to understand than commonly believed. 33


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Chapter 11 COMPLIANCE ISSUES FOR CANADIAN FINANCIAL PLANNERS CONCERNING U.S. RARE COIN INVESTMENTS Rare U.S. coin investments have been promoted widely since the late 1970's in the United States. Many investors profited handsomely from these ventures. Many suffered great losses. Critical to the issue of losses or gains was the firm selected as supplier. Presently, rare coin investments are being promoted in various forms to both investors and planners. Some programs offer direct investments; some are multi-level marketing plans. There are several important questions that the Canadian planner should ask of his potential rare coin supplier. 1. Has the rare coin firm been reviewed by the planner's broker or dealer to insure that due diligence requirements have been met? 2. Has the rare coin program been reviewed by the provincial securities commission or legal counsel to assure that the planner will not violate the full time requirement of his licence? 3. If the coin firm is headquartered in the U.S., has the firm made proper inquiries and arrangements with Canada Revenue and Customs Agency with regard to Goods and Services Tax and any customs duties? Are correspondence documents with Canada Revenue and Customs Agency on file? 4. How long has the firm been in continual business? What experience does the firm have in dealing with the Canadian investor? 5. How long has the firm been in business in Canada? 6. How familiar is the coin firm with Canadian securities regulations, investment products, investment vehicles and Canadian tax law? 7. Does the firm have materials and services that have been developed for use in Canada? 8. What is the written disclosure that is provided to the client and to the financial planners by the firm? What are commissions involved and are those also disclosed? 9. What training is provided to representatives? Is the training accepted for Continuing Education Credits for CFPs or RFPs? 10. What is the financial strength of the firm? Is it independently audited by a major accounting firm? Are the financials available for inspection? These are the preliminary questions that must be answered. There are other issues that must be addressed concerning the area of U.S. rare coins themselves, such as portfolio selection and makeup, pricing, markups, liquidation services and delivery options. This list should be helpful as a starting point in your investigation.

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CHAPTER 12 RARE COINS AND CASH: THE DANGER OF “STRUCTURING� Rare coins are one of the few investments that are still private in the sense that a Social Security or tax identification number is not required in the transaction. There is, however, a major exception to this rule. In the event over $10,000 is received in cash in related transactions, a Form 8300 must be filed with the IRS, reporting the details of the transaction, including the taxpayer identification number (TIN) of the purchaser. What if the client asks you if the reporting requirement can be avoided? The answer to that is NO. Don't even think about helping avoid that process because it's called "structuring" and comes complete with severe criminal penalties including imprisonment, heavy fines and major problems with law enforcement agencies, including the NASD and the SEC. What is structuring specifically? The IRS gave an example in their proposed regulation for comment in 1993. "Example 1. A person has a tacit agreement with a gold dealer to purchase $36,000 in gold bullion. The reporting requirement of this section cannot be avoided by recasting the single sales transaction into four separate $9,000 sales transactions." Structuring is not only the actual transaction but is also the giving of advice of how to avoid reporting requirements. Simply, if a client asks how a transaction of $10,000 can be negotiated without reporting it to the IRS, any advice given to the client on how to accomplish this is also structuring. As a further example, if you advise a client that making several smaller purchases under $10,000 with several different dealers would eliminate the reporting requirement, that advice is structuring. Financial planners dealing with multiple transactions of cash should be very aware of the fact that the IRS states that Form 8300 must be filed if the planner as a recipient of the cash knows, or has reason to know, that each transaction is one of a series of connected transactions that will total $10,000 or over within one year of the initial payment. Further, voluntary use of Form 8300 may be filed for suspicious cash transactions even if the amount does not exceed $10,000. The penalties for violation of the cash reporting requirements are severe as shown in this excerpt from Form 8300: "Penalties - You may be subject to penalties if you fail to file a correct and complete Form 8300 on time (by the 15th day after the cash was received- Ed) and you cannot show that the failure was due to reasonable cause. You may also be subject to penalties if you fail to furnish timely a correct and complete statement to each person named in a required report. A minimum penalty of $25,000 may be imposed if the failure is due to an intentional disregard of the cash reporting requirements.

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Penalties may also be imposed for causing, or attempting to cause, a trade or business or fail to file a required report; for causing or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both." In May of 1992, The Financial Crimes Enforcement Network ("FinCEN") was established by the Treasury Department. Its purpose: to provide an intelligence and analytical network in support of the detection, investigation and prosecution of domestic and international money laundering and other financial crimes. The users of this network are Federal, State, local and foreign law enforcement agencies. Several "sting" operations have resulted in successful prosecutions of some coin dealers and financial advisors. The pleading of ignorance to these laws fall on deaf ears. Know the laws, comply with them. Violating this statute is not worth your career.

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Chapter 13 APPRAISALS OF RARE COINS AND OTHER TANGIBLE PROPERTY Appraisals of rare coins and other tangible personal property are an integral part of estate planning. Appraisals are required for estate tax, charitable contributions and gift tax purposes. A key element in the process is the choosing of an appraiser. In rare coins, the appraiser must be familiar with trends in the entire rare coin market as well as the individual specialization areas he or she may have in order to accurately provide appraisals that will be submitted to the Internal Revenue Service. Some rare coins are relatively easy to evaluate than most other forms of tangible assets due to the wide empirical database that exists. U.S. rare coins have independent pricing guides that are published weekly, recognized, independent certification services and a strong established auction history. However, some rare coins are rather esoteric and require a skilled appraiser to be able to evaluate the factors of provenance, rarity, varietal type, quality and in cases of uncertified coins, the condition based on contemporary standards. It is also important that the appraiser is aware of the IRS rules governing appraisals as set forth in the Internal Revenue Code of 1986, the Treasury regulations promulgated under the Code and interpreting authority. Neither the IRS nor Congress has yet sought to unify the appraisal requirements income tax, estate tax or gift tax purposes. Crucial differences exist, such as (1) the requirement that certain estate tax but not income tax or gift tax appraisals be made under oath, and (2) the minimum values (e.g. $3,000, $5,000 or $10,000) above which special appraisal requirements apply. As a result, in contracting for an appraisal to be used for tax purposes, the practitioner should take care to state clearly the tax purpose for which the appraisal in being obtained. In addition, the practitioner should review the draft appraisal for compliance with the specific requirements applicable to the target tax purpose. The most common situations in which tangible personal property must be valued for tax purposes are: ¨ When a taxpayer claims a charitable deduction his or her income tax return ¨ When an executor values a decedent's personal effects ¨ When a taxpayer reports the value of a gift on a gift tax return Other purposes are discussed in the following paragraphs including regulations governing excess benefit transactions that involve certain exempt organizations. In each case the taxpayer or executor may be required to supply or rely upon an appraisal of the property. The specific requirements are different in each situation. Income Tax Purposes The most complicated of appraisal requirements are those demanded of a taxpayer claiming a charitable deduction. For any item of tangible personal property valued at over $5,000 the taxpayer must obtain a "Qualified Appraisal" and attach an "Appraisal Summary" to the income tax return. If any item is valued at over $20,000 the taxpayer must attach the Qualified Appraisal itself rather than the Appraisal Summary to the tax return. The appraisal regulations under section 170 specify in detail the requirements of a Qualified Appraisal. These requirements are summarized in IRS Publication 561. "Determining the Value of Donated Property". Taxpayers and advisors should bear in mind that this publication is intended only for assistance in preparing income tax returns, not estate or gift tax returns. The four general requirements of a Qualified Appraisal are as follows: (A) It must be made not more than 60 days before the date of the contribution of the property to the charity and not later than the due date of the return on which a deduction for the contribution is claimed, 39


(B) No part of the fee for the appraisal can be based on a percentage of the appraised value of the property (C) It must be prepared and signed by a "Qualified Appraiser" and all appraisers who contribute to its preparation must also sign it. (D) It must include: (1) A detailed description of the property from which someone who is not generally familiar with the type of property could recognize this particular item; for certified coins the description should include the certi fying organization, such as PCGS, NGC or ANACS and the certification number on the case (2) A description of the physical condition of the property. For certified coins the grade of the coin on the case is sufficient. (3) The date (or expected date) of contribution (4) The terms of any agreement that the donor has entered into or expects to enter with regard to the property; (5) The name, address and taxpayer ID number of the Qualified Appraiser or Appraisers and if the Qualified Appraiser is employed or engaged as an independent contractor by another person or firm, the name, address and taxpayer ID number of that person or firm; (6) The qualifications of the Qualified Appraiser who signs the appraisal, including the appraiser's back ground, experience, education and any membership in professional appraisal associations; (7) A statement that the appraisal was prepared for income tax purposes; (8) The date or dates the property was valued; (9) The appraised fair market value on the date of the contribution; (10) The method of valuation used to determine the fair market value; (11) The specific basis for the valuation; (12) A description of the fee arrangement between the donor and appraiser. The regulations under section 170 provide very detailed guidelines concerning the qualifications of a Qualified Appraiser. These guidelines are intended to insure that The Qualified Appraiser is competent to make the appraisal and are sufficient ly disinterested to be able to render an honest opinion of value. The regulations provide: (A) Certain individuals are not allowed to be Qualified Appraisers, including: (1) The donor of the property (or taxpayer who claims the deduction) (2) The donee of the property (3) A party to the transaction in which the donor acquired the property, such as the person who sold the property to the donor, unless the donor makes the donation within two months of acquiring the proper ty and claims an appraised value no higher than the price at which it was acquired (4) A person who regularly prepares appraisals for one of the above and who does not perform a majority of his or her appraisals for other persons; (5) A person employed by or related to any of the above persons in (1), (2) or (3) above. (B) A Qualified Appraiser must certify on the Appraisal Summary that he or she: (1) Holds himself or herself out to the public as an appraiser, or performs appraisals on a regular basis; (2) Is qualified to make appraisals of the type of property being values because of the qualifications in the appraisal; (3) Is not one of the excluded individuals named above; (4) Is not receiving an appraisal fee based upon a percentage of the appraised property value; and (5) Understands that there is a penalty for aiding and abetting under a statement of tax liability. (C) A person cannot be a Qualified Appraiser if the donor has knowledge of facts that would cause a reason able person to expect that the appraiser will overstate the value of the donated property. 40


A taxpayer who claims a charitable deduction greater than $500 must attach IRS Form 8283 to his or her income tax return and fill out Section A of the form, which requires information about the donated property and the donation. When a taxpayer claims a deduction for an item valued at more than $5,000, he or she must also fill out Section B of the form. Section B is the "Appraisal Summary". The Appraisal Summary require additional information about the donated property as well as the signature of the donee and a certification signed by the Qualified Appraiser containing the representations described above. In 1996, the IRS issued Revenue Procedure 96-15, which provides the procedures through which a taxpayer may request from the IRS a binding (on the IRS and the taxpayer) "Statement of Value" as to any item of art that has been appraised at $50,000 or more. The taxpayer may then use the Statement of Value to substantiate the value of the property for income, estate of gift tax purposes. A taxpayer who requests a Statement of Value to substantiate a charitable contribution of property must submit to the IRS a Qualified Appraisal, a required user fee of $2,500 and an Appraisal Summary. Because the taxpayer can request a Statement of Value only after the contribution has been made, the steps outlined in Revenue Procedure 96-15 is of little practical use to the taxpayer. A taxpayer seeking a Statement of Value for estate or gift tax purposes must submit to the IRS an appraisal containing certain specified information, a required user fee of $2,500, a description of the item, the appraised fair value of the item, the cost, date and manner of acquisition and the date of death (or alternate valuation date, if applicable) or the date of the gift. Again, obtaining a Statement of Value is often of little practical use to the taxpayer as it just accelerates review of values and is therefore not a help in planning. Estate Tax Purposes When an estate includes household and personal effects, the executor must file Schedule F of the estate tax return, itemizing the property and reporting its value. All items of property must be listed separately unless they have a value of less than $100. Items having a value less than $100 and contained in the same room on the date of death can be grouped together. As an alternative to itemizing, the executor may provide a written statement, prepared under penalties of perjury, setting forth the aggregate value of the property as appraised by competent appraisers of recognized standing and ability (or by dealers in the class of property involved). As a practical matter, in large estates one or more appraisers value almost all "miscellaneous property". The reasons for this include (1) that the alternative to itemizing, mentioned above, requires that executors rely on appraisals by either a competent appraiser or a dealer, and (2) that the Internal Revenue Code prescribes penalties for both undervaluing and overvaluing estate property. These penalties may be waived on a showing of "reasonable cause and good faith", which may be demonstrated by justifiable reliance on a professional appraisal. In determining whether reliance on a particular appraisal demonstrated "reasonable cause and good faith", the IRS will take into account; (1) the methodology and assumptions underlying the appraisal, (2) the appraised value, (3) the relationship between appraised value and purchase price, (4) the circumstances under which the appraisal was obtained, and (5) the appraiser's relationship to the taxpayer or to the activity in which the property is used. Certain types of tangible personal property must be appraised separately, specifically, items having marked artistic or intrinsic value in excess of $3,000, such as jewelry, furs, silverware, paintings, etchings, antiques, books, vases, oriental rugs or coin and stamp collections. The appraisal of such items must be made by an "expert or experts" and it must be made under oath, an often overlooked requirement. The appraisal must also be accompanied by the executor's written statement, made under penalties of perjury, as to the completeness of the itemized list of such property and as to the disinterested character and the qualifications of the appraiser or appraisers. 41


The regulations provide little guidance regarding the preparation of estate tax appraisals. Other wise, they merely provide guidance for appraisals of specific types of property: (1) Books in sets by standard authors should be listed in separate groups; (2) In listing paintings having artistic value, the size subject and artist's name should be stated; (3) In the case of oriental rugs, the size, make and general condition should be given; and (4) In the case of silverware, sets of silverware should be listed in separate groups, groups of individual pieces of silverware should be weighed and the weights given in troy ounces and, in arriving at the value of silverware, the appraisers should take into consideration its antiquity, utility, desirability, condition and obsolescence. Additional general and specific guidance for estate tax appraisals has been provide in Revenue Procedure 66-49. Revenue Procedure 66-49 suggests that, for general purposes, an appraisal report should contain as least the following: (1) A summary of the appraisers qualifications; (2) A state of value and the appraiser's definition of the value he obtained; (3) The bases upon which the appraisal was made; and (4) The signature of the appraiser and the date the appraisal was made. Gift Tax Purposes A taxpayer who makes a completed gift is required to file a gift tax return on IRS Form 709 and, except to the extent of a deduction such as the charitable or marital deduction, pay tax on the transfer at graduated rates based on the value of the gift if the gift generates a tax in excess of the unified credit amount. The instructions for the gift tax return and the applicable regulations require that the taxpayer attach to the return either a detailed description of the method used to determine the fair market value of the gifted property or an appraisal of the gifted property. The regulations provide specific guidance regarding the preparation of gift tax appraisals. Although fairly general and applicable to gifts of many types of property, the regulation specify that a gift tax appraisal contain the following information: (1) The date of the gift; (2) The on which the gifted property was appraised and the purpose of the appraisal; (3) A description of the gifted property; (4) A description of the qualifications of the appraiser (5) A description of the appraisal process used; (6) Any information considered in determining the appraised value; (7) The appraisal procedures followed, and the reason that supports the analyses, opinion and conclusions reached in the appraisal; (8) The valuation method used, the rationale for the valuation method, and the procedure used in determining the fair market value of the gifted property; and (9) The specific basis for the valuation, such as specific comparable sales or transactions. The regulations also specify that an individual who meets the following criteria must prepare a gift tax appraisal: (1) Holds himself or herself out to the public as an appraiser, or performs appraisals on a regular basis; (2) Is qualified to make appraisals of the type of property being valued because of his or her qualifications. As described in the appraisal; and 42


(3) Is not the donor or recipient of the property or member of the family of the donor or recipient (which includes spouses, ancestors, lineal descendants and spouses of lineal descendants) or any person employed by the donor, the recipient or a member of the family of either donor o recipient. The rules for the appraisal of tangible personal property may seem complicated but can become critically important if the advisor engages an appraiser who is not thoroughly familiar with them. For this reason, an advisor should insure that the appraiser has up-to-date knowledge of both appraisal formats and the marketplace in which the most sustainable comparable values can be found.

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Chapter 14 RARE U.S. COINS: SPECIAL CONSIDERATIONS FOR REGISTERED REPRESENTATIVES: REQUIREMENTS UNDER NASD CODE 3030 AND 3040 Many financial planners have approached their broker-dealers on the subject of offering rare U.S. coins to their clients. Many compliance officers are unfamiliar with this area and provide incorrect information as to the status of rare coins as being a security and the ability of the representative to market them without broker dealer approval. In addition, many representatives are wrongly advised by coin wholesalers that the offer of rare coins to their clients need not be reported to their broker-dealer. In fact, close examination of the regulations reveals that all that is required of a representative to engage in outside activity under NASD Code 3030 in a non-security product, is to provide prompt written notice to the broker-dealer. Approval by the broker-dealer is not a required element. The following information is intended to provide guidance to both compliance officers and registered representatives on the current regulations and opinion with respect to U.S. rare coin purchases. NASD Code 3030. Outside Business Activities of an Associated Person No person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member. Such notice shall be in the form required by the member. Activities subject to the requirements of Rule 3040 shall be exempted from this requirement. [Adopted effective Oct. 13, 1988.] Selected Notices to Members: 88-45, 88-86, 89-39, 90-37, 94-44, 94-93, 96-33, 01-79. Source: NASD Manual, Conduct Rules 2000-3410 NASD Rules of Fair Practice as reviewed in Notice to Members 94-44 and 96-33 “Article III, Section 40 requires that any person associated with an NASD member who participates in a private securities transaction must, before participating in the transaction, provide written notice to the member with which he or she is associated.” “Where the RR/IA does not participate in the execution of securities transactions, NTM 94-44 reminds members and their RR/IAs that while Section 40 may not apply, the activity, nonetheless, may be subject to the notification provisions of Article III, Section 43…” “That section requires a RR to provide written notice* to the NASD member with which he or she is associated of any proposed employment or outside business activity pursuant to which he or she will receive compensation from others. The form and content of an Article III, Section 43 notice is to be determined by the NASD member.��� NASD Rules of Fair Practice as reviewed in Notice to Members 01-79 A registered person who sells a security away from his or her firm without first obtaining written approval from the firm violates NASD Rule 3040, and a registered person who engages in an outside business activity without prior notice to his or her firm, including the sale of non-securities products, violates NASD Rule 3030.

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Rule 3040 applies to all sales of securities, including promissory notes that are securities. Rule 3040 ensures that, if a firm approves an associated person’s participation in a securities transaction,7 the firm assumes certain critical regulatory responsibilities that go with offering and selling securities to customers. In addition to requiring that the transactions be recorded on the firm’s books and records, the firm must exercise appropriate supervision over the associated person in order to prevent violations of the securities laws. Rule 3040 requires registered persons to provide notice of the proposed transaction, in writing, to his or her firm, before the sale is made. The notice must describe the proposed transaction(s) in detail and the associated person’s proposed role and must also state whether the individual has received or may receive selling compensation (including any type of referral fee). Oral notice to the firm is not sufficient to meet the requirements of Rule 3040. If the associated person expects to receive compensation, the firm must advise the registered person, in writing, whether it approves or disapproves the person’s participation in the proposed transaction. If the firm disapproves the person’s participation, he or she may not participate in the transaction in any manner, directly or indirectly. If the (item) in question is not a security, the registered person is required under Rule 3030 to provide prompt written notice to his/her member firm that he or she has accepted compensation outside the scope of his relationship with the firm. . NASD Code 3040 3040. Private Securities Transactions of an Associated Person (a) Applicability No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule. (b) Written Notice Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person’s proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice. (c) Transactions for Compensation (1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member: (A) approves the person’s participation in the proposed transaction; or (B) disapproves the person’s participation in the proposed transaction. (2) If the member approves a person’s participation in a transaction pursuant to paragraph (c)(1), the transaction shall be recorded on the books and records of the member and the member shall supervise the person’s participation in the transaction as if the transaction were executed on behalf of the member. (3) If the member disapproves a person’s participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly (d) Transactions Not for Compensation In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction

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(e) Definitions For purposes of this Rule, the following terms shall have the stated meanings: (1) “Private securities transaction” shall mean any securities transaction outside the regular course or scope of an associated person’s employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 3050, transactions among immediate family members (as defined in IM-2110-1, Free-Riding and Withholding), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded. (2) “Selling compensation” shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder’s fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements. [Adopted effective Nov. 12, 1985.] Selected Notices to Members 85-54,85-84, 94-44, 96-33. Are Rare Coins Considered a Security? In the normal circumstance, rare coins are not securities. The definition of a security involves several factors. The Securities Act of 1933 defines the term "security" to include any "investment contract". In SEC vs. W.J. Howey Company, 328 U.S. 293 (1946), the Supreme Court defined the term "investment contract" as follows: "(A)n investment contract for purposes of the Securities Act means a contract, transaction or scheme, whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party..." The elements of "common enterprise" and "expectation of profits solely from the efforts of the promoter or third party" are generally held not to be present in sales of commodities, precious metals or rare coins where the purchaser acquires control over the commodity and is dependent on the state of the market and his own evaluation of it for any return on his investment. References for review are: 1) .Madison Mint Corporation, Inc. 1976-77 CCH Federal Securities Law Reporter Paragraph 80,619 (1976) 2).Charles Anthony Diamond Investments, Inc., 1976-77 CCH Federal Securities Law Reporter, Paragraph 80,623 (1976) 3).Investment Diamonds, Inc. 1971-72 CCH Federal Securities Law Reporter, Paragraph 78,350 (1971) Further analysis of the "Howey" tests regarding "common enterprise" and "profits solely from the efforts of others" caused the court in SEC vs. Glenn Turner Enterprises, Inc. (CA-9 1973), '72-'73 CCH Federal Securities Law Reporter, Paragraph 93,748 to define "solely" to be read as undeniably significant efforts, those essential managerial efforts that affect the failure or success of the venture. It is opined that if rare coins are held by the purchaser, with no guarantee or advertisements that the value of coins will equal the purchase price; there will be no guarantee of profit, nor any investment advisory services or monthly investment plans, it would indicate the lack of "security" status. Therefore, NASD Code 3040 does not apply. There are forms where rare coins are definitely a security. These were the various limited partnerships, such as the Merrill Lynch World Coin Fund and the Kidder-Peabody American Coin Fund. Rare coins are simply packaged in a securitized form, that of a registered fund or LP. Finally, rare coin sales are not subject to regulations of the Securities Exchange Commission or the National Association of Securities Dealers. The Federal Trade Commission is the regulatory agency that oversees rare coin firms as they do other retail sales organizations. 47


Sample 3030 Notification Letter from Representative to Broker Dealer – After Transaction

TO BE RETYPED –NOT COMPLETED AS A FORM (DATE) (COMPLIANCE OFFICER) (NAME OF BROKER DEALER) (ADDRESS) (CITY), (STATE), (ZIPCODE) Dear Sir: I have been asked by my clients to assist them in purchasing portfolios of certified rare coins from (NAME OF COIN FIRM). Under the terms of NASD Rule 3030, I am hereby making notification that my clients have made make these acquisitions and that I have received compensation for my assistance in the transaction. The proposed purchases are retail transactions and NOT outside securities transactions subject to reporting requirements under NASD Code 3040. Certified rare coin portfolios are not currently being offered or sold by (NAME OF BROKER DEALER). My clients have evaluated these transactions and are relying upon that information in their purchase decision. They do not look to (NAME OF BROKER DEALER) for any information, advice or assistance in this matter. This letter will meet the requirements of NASD Code 3030 and allow me to continue to properly serve my clients. Sincerely, (NAME OF ACCOUNT REPRESENTATIVE)

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Sample 3030 Notification Letter from Representative to Broker Dealer – Prior to Transaction

TO BE RETYPED –NOT COMPLETED AS A FORM (DATE) (COMPLIANCE OFFICER) (NAME OF BROKER DEALER) (ADDRESS) (CITY), (STATE), (ZIPCODE) Dear Sir: I have been asked by my clients to assist them in purchasing portfolios of certified rare coins from (NAME OF RARE COIN FIRM). Under the terms of NASD Rule 3030, I am hereby making notification that my clients wish to make these acquisitions and that I will receive compensation for my assistance in the transaction. The proposed purchases are retail transactions and NOT outside securities transactions subject to reporting requirements under NASD Code 3040. Certified rare coin portfolios are not currently being offered or sold by (NAME OF BROKER DEALER). My clients have evaluated these transactions and are relying upon that information in making their purchase decision. They do not look to (NAME OF BROKER DEALER) for any information, advice or assistance in this matter. This letter will meet the requirements of NASD Code 3030 and allow me to continue to properly serve my clients. Sincerely, (NAME OF ACCOUNT REPRESENTATIVE)

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Weekly pricing via independent electronic nationwide service (CCE) reported in independent weekly published price sheets Daily price quoted sightunseen for certified coins. Wholesale liquidation NLT 3 days; auctions vary from 2 weeks to 90 days. Auction advance available Can be done immediately, sight-unseen for certified coins 2nd largest internationally collected asset. Excess of $1 billion annual market Assured with independent grading by Professional Coin Grading Service (PCGS) or Numismatic Guaranty Corporation (NGC)

Pricing

* Source: Independent study, L.A. Research, Pennsylvania State University 2002

Performance History

Guarantee of Authenticity

Size of Market

Evaluations

14.3% per year from 1978-2002 for MS65 U.S. rare coins, all types, copper, nickel, silver and gold *

Stores easily in bank safe deposit box or home safe

Storage

Liquidity

No special requirements

Easy to transport. Coins are small in size. Can be shipped via registered insured US Mail

Portability

Maintenance

Certified Rare U.S. Coins

Feature

Appendix 1

Not recorded due to uniqueness of items

Not recorded due to uniqueness of items

Auction house guarantee

Approximately 6th largest collectible market

Approximately 4th largest collectible market Auction house guarantee

Must be physically examined

Same as Art

Same as Art

Very difficult to transport. Large, bulky items require professional movers and insurance which add to cost Risks include rot, insects, mildew and warping from excessive heat or cold Same as Art.

Antique Furniture

Must be physically examined

Auctions usually held once a quarter. Auction advance usually available

Difficult for investor. Must be displayed or proper ventilated storage must be used. Temperature sensitive Estimates only. Values established when item is sold

Size of painting dictates portability. Paintings (framed) must be boxed and protected during shipment Must be protected from mildew, excessive sunlight and dust

Art (Old Masters)

Largest collectible market in number of collectors, but lower cost per unit values Grading and authenticity available with (American Philatelic Society (APS), Philatelic Foundation (PF) or Philatelic Stamp Experts (PSE) certifications. No current standardization. Values have steadily declined since 1980

Must be physically examined

Pricing is established quarterly. Two price systems sometimes conflict (Harris catalog vs. Scott catalog) Prices based on last quarterly price sheet. Auctions held monthly at most, usually every two months

Stores easily, but must be in humidity controlled conditions

Very susceptible to humidity

Easy to transport. Same conditions as coins

Rare Stamps

CERTIFIED RARE U.S. COINS vs. VARIOUS COLLECTIBLES


ABOUT THE AUTHOR Mr. Marus has been active in the financial planning field since 1972 beginning as a professional life agent in the State of Michigan. He began to specialize in tangible investment portfolios in 1975 and formed North American Investment Management Corporation in 1976, serving as President. Under his guidance, over $17,000,000 in rare coins, rare stamps and art objects were included in clients' investment portfolios, in addition to traditional equity investments, from 1976 to 1980. Mr. Marus was the leading representative in sales for two major international firms dealing in rare coins and rare stamps. In 1980, he sold his interest in North American Investment Management and continued in private practice with Burnett Marus Associates, Ltd., as an industry consultant in tangible asset investments. He conducted seminars on the subject for a number financial organizations as the International Association of Financial Planning, the Canadian Association of Financial Planners, the National Association of Estate Planners and Councils and the American Society of CLUs and ChFCs. In 1981, Mr. Marus accepted the position of President of U.S. Numismatic Investment Group, Inc., one of the nation's largest rare coin investment firms and an affiliate of Heritage Capital Corporation. Heritage Capital Corporation also includes Heritage Rare Coin Galleries, Heritage Numismatic Auctions, Inc., and Currency Auctions of America, Inc. During his tenure, Mr. Marus changed the corporation name to U.S. Tangible Investment Corporation, adding rare stamps to the product line and specialized services to the investment community. In January 1985, Mr. Marus was promoted to Vice President, Investment Sales for the parent company, Heritage Capital Corporation. Mr. Marus successfully expanded company operations into Canada in 1986 establishing U.S. Tangible as a major supplier of rare coin services in the provinces of Ontario, Alberta, British Columbia, Nova Scotia, New Brunswick and Quebec. Eastern Michigan University also awarded Mr. Marus their prestigious Alumni Achievement Award in 1986. He was named as the advisor to the first limited partnership in rare U.S. coins in Australia in 1991. In 1996, Mr. Marus was named to the “International Who's Who of Professionals". He was recently elected to the National Board of Directors of the International Association of Registered Financial Consultants and also served as a member of the Board of Directors of the Dallas-Fort Worth chapter of the International Association for Financial Planning for seven years. He has been a frequent and popular guest on numerous radio and television talk shows in the United States and Canada discussing tangible asset investments as well as conducting many educational seminars on the topic. His courses include Rare Coins and Trusts; Tangible Asset Basics for the Financial Advisor; Asset Allocation Strategies Using Tangible Assets and The Use of Tangible Assets in Qualified Plans. All of the courses are acceptable for CPE credits for CPAs, CFPs, RFCs in the United States and for RFPs, CFPs, CGAs and CAs in Canada. Among the organizations he has spoken for are: The National Convention of the International Association of Registered Financial Planners; IAFP Chapters in Long Island, Detroit, Dallas-Fort Worth, San Antonio, Houston, Quad Cities, Birmingham, New Orleans and Pittsburgh; the National Association of Insurance and Financial Advisors; the 2001 Financial Advisors Forum; the British Columbia Chapter and the British Columbia North Chapter of the Canadian Association of Financial Planners; The Iowa Medical Society; Eastern Michigan University; Purdue University and the University of Tulsa. His articles have been published in Financial Planning, Trusts and Estates, The Stanger Register, Ticker Magazine, The Investment Advisor, The Journal of Personal Finance, The Financial Times (Canada), The Detroit News, The Montreal Gazette, The Vancouver Sun and The Calgary Sun among others. He resides in Dallas, Texas with his wife, Shirley.


Publisher: Burnett Marus Associates Richardson, Texas 75081 Manufactured in the United State of America August 2003, First Edition


US Rare Coin Investments: A Practical Guide for Financial Advisors