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Class Envy

New regulations proposed by the National Indian Gaming Commission still controversial

Since he took over as chairman of the National Indian Gaming Commission in December 2002, Phil Hogen has been attempting to draw a “bright line” between Class II and Class III gaming in Indian Country. The task is important because the U.S. Department of Justice has periodically attempted to prosecute tribes that employ machines that seem to straddle the two classifications. In fact, he was advised by officials with the DOJ that if the NIGC didn’t clarify the situation, they would, and not in the way the tribes would appreciate.

In late October, the NIGC published a set of proposed regulations that would define the line between Class II and Class III. Even before the regs were officially published, the groups it would primarily affect announced that they would oppose them.

In a letter to the commission, manufacturers and operators contended they were not given enough input and they were not permitted to review the final draft regulations. The groups complain that the published regulations represent only a “modest” change from a 2006 submission drawn up by the NIGC that, according to the groups, “essentially destroy the Class II gaming industry.”

Hogen said the new regulations were essential to the survival of Class II gaming.

“Bingo and Class II gaming is the bedrock upon which Indian gaming was built, and its integrity needs to be maintained,” Hogen said. “With the bright line that will be drawn when these regulations are finalized, tribes may confidently invest in equipment, lenders’ concerns over challenges in this area will be allayed, and tribes will have a clearer basis from which to negotiate with states for Class III compacts.”

In the letter objecting to the regs, the groups argued that changes are arbitrary. While not as onerous as the proposed 2006 regs, the groups say the new regs don’t address the real issues.

“During this year-long process, the commission released a series of ‘matrices’ which reflected some modest modifications of some of the more arbitrary aspects of the 2006 classification proposal. While we applaud the abandonment of some of the unnecessarily restrictive time delays, and of some of the purely cosmetic demands (primarily details of screen display), we strongly believe that the fundamental fatal flaws of the 2006 Classification Standards have not been addressed.”

Hogen disagrees and points to some concrete changes proposed by the new commission regulations.

“Those people who were telling us that we’d bring the Class II industry to its knees by slowing down the play dramatically should be happy because we’ve dramatically changed that,” he told Global Gaming Business. “We did weigh the economic impact of any regulation we proposed and found that it would be too dramatic a change to require such a long time to play the game.

“We also included a grandfather clause. We know the tribes have invested heavily in the equipment that’s out there. We’re proposing that when these rules become final, that if the devices that are on the floor now meet certain minimum requirements-they don’t have to meet all the requirements, just the minimum-they can be played for five years, which we have determined to be the useful life of equipment like this. This will soften the economic impact greatly, in our view.

“And if history is any guide, manufacturers will soon be coming out with faster machines that are more fun to play that meet these regulations, making it essential that casinos remain competitive with each other.”

Despite the grandfather clause, the Class II industry says the commission has not made enough modifications.

“The capital requirement at the end of the grandfathering period will create a substantial financial hardship on Indian casino irrespective of the depreciation method employed by tribes or vendors on these assets,” they wrote the commissioners. “The cost of replacing even fully depreciated assets after this five-year grandfather period will be an economic burden and cripple many tribal and interdependent economies.”

While the industry says the technical standards and case law support very few changes, Hogen says there is a need to establish this bright line.

“That’s the problem,” he says. “We’re not changing the rules; there simply were no rules. There has been this need to finalize these rules for all these years and we’re just trying to get there.”

Hogen says the tribes and manufacturers have worked closely with the commission to establish these rules.

“In 2004, we assembled a tribal advisory committee to assist us,” he says. “We asked tribes to nominate the best and the brightest from both those who regulate and those who operate these devices. We met often and long with this committee. They have helped us right the federal regulations that will draw this bright line between the two types of devices.”

Even the industry acknowledges it has been an “extraordinary process.”

“The tribal gaming working group, supporting the tribal advisory committees in their work with high-level commission staff, helped achieve the common goal of producing good technical and control standards,” the letter says. “The benefit to the tribal gaming industry would have been considerable. The benefit to the federal government should be obvious, as even Chairman Hogen noted that the process should form a model for future rule-making processes.”

Hogen says the proposed regs will benefit all those parties.

“There is a difference between Class II and Class III,” he says, “and there’s a clear way to

ascertain on which side of the line the equipment falls. Once we’ve completed this process, the industry can build to the specifications and the tribes can invest with full confidence that these machines will be legal.”

The industry, however, believes the status quo is better.

“The regulations the NIGC is now considering would replace those regulations with uncertainty and stagnation, at best, and total destruction, at worst,” the industry insists. “Even in the best reading, the commission’s regulations would limit tribal Class II gaming to a very small universe of awkward games. This is not a recipe for economic survival-but one for economic disaster.”

Roger Gros is publisher of Global Gaming Business, the industry's leading gaming trade publication, and all its related publications. Prior to joining Global Gaming Business, Gros was president of Inlet Communications, an independent consulting firm. He was vice president of Casino Journal Publishing Group from 1984-2000, and held virtually every editorial title during his tenure. Gros was editor of Casino Journal, the National Gaming Summary and the Atlantic City Insider, and was the founding editor of Casino Player magazine. He was a co-founder of the American Gaming Summit and the Southern Gaming Summit conferences and trade shows. He is the author of the best-selling book, How to Win at Casino Gambling (Carlton Books, 1995), now in its fourth edition. Gros was named "Businessman of the Year" for 1998 by the Greater Atlantic City Chamber of Commerce, and received the Lifetime Achievement Award from the American Gaming Association in 2012.

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