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Regulating the Regulators

Should regulators of the multi-state, billion-dollar casino industry come from the outside?

Regulating the Regulators

Last year, a lawmaker’s wife was quietly appointed to the Pennsylvania Gaming Control Board for a two-year term, at a salary of $145,000 per year.

Frances Regan was installed in a private ceremony, without fanfare, hearings or even a press release. With no prior background in gaming, the wife of Republican state Senator Mike Regan reportedly was an investigator for the federal parole board before teaching “fitness classes to empower women.”

Several months earlier, former Democratic lawmaker Frank Dermody was appointed to the same body, at the same salary, after 30 years in the House. Within three months of losing his political seat, Dermody leapfrogged to the new position, to make about $15,000 more per year than he had earned as a representative.

The dual appointments met with skepticism from newspapers like the Pennsylvania Star-Capital, which called the state Gaming Control Board “a patronage dumping ground” for former lawmakers, legislators, and oh yes, their relatives.

The selections “don’t require the state Senate’s approval,” as do others, griped columnist Mark O’Keefe. “There are no clear skills or abilities necessary for membership… It all leads to more significant questions, such as precisely what these board members do to earn such high salaries, and why seven board members are needed.”

If nothing else, such appointments smack of “favoritism to political insiders or special interests,” said Khalif Ali, executive director of Common Cause Pennsylvania, in an interview at the time.

Gaming regulators are charged with watching the store. In Pennsylvania’s case, that store raked in $4.73 billion in revenues in 2021 and could blow past that figure in 2022, especially with the Phillies and Eagles in play. But who is really watching the regulators?

Cleaning Up

When the nation’s first gaming commission was established in Nevada in the late 1950s, lawmakers were acting defensively, to safeguard a money-making business that once had been in the pocket of organized crime.

“They were concerned that the federal government might make gambling illegal,” says Richard Schuetz, a former casino executive who served as a gaming regulator in both California and Bermuda. “The regulatory system was purpose-built to stop the impact of organized crime on the industry, to clean it up and legitimize it.”

“Hiring people who don’t know what they’re regulating is a fool’s errand.” —Richard Schuetz, former casino executive and gaming regulator

At the time, it may have made sense to appoint outsiders, people with no prior link to an insular business tainted by the mob. That thinking still prevailed in the 1970s, when gambling opened up in New Jersey. “They came back with even a stronger regulatory model,” says Schuetz, “and made sure that nobody had ever been involved with the industry.”

But what about now? Gaming has moved beyond brick-and-mortar stores into the hyper-technical realm of mobile and online betting. Should those appointed to oversee it come in as trainees, with no subject-matter expertise?

Gaming attorney Tony Cabot, a founder and past president of the International Masters of Gaming Law and past president of the Nevada Gaming Attorneys Association, says no.

“To populate all these regulatory agencies with people who know nothing about gambling is a really bad idea for a lot of reasons,” says Cabot, who also teaches gaming law at the University of Nevada, Las Vegas. “One of the pillars of regulatory failure is not having sufficient knowledge to regulate the industry—for one thing, the regulated have a huge advantage over you.”

In the case of Pennsylvania, news outlet Spotlight PA charged that, instead of licensing the highest-qualified bidders, state board members “granted licenses based on subjective assertions” by would-be operators, “such as economic impacts and gaming markets.” Clearly, optimistic revenue projections should not be accepted credulously or without thorough vetting.

“Hiring people who don’t know what they’re regulating is a fool’s errand,” Schuetz says. “How would you like it if you were going in for a complicated surgery and they said, you’ll be happy to know the people who oversee these surgeons know nothing about surgery? Or that the bridge you’re driving over was regulated by people who don’t know anything about building bridges?”

As a commissioner in California from 2011 to 2015, Schuetz says, he was the only person with a gaming background, and it was a distinct disadvantage. “We had to stop meetings all the time when they’d use a term like ‘cold deck,’ because no one understood what it was.”

Checks and Balances

It goes without saying that commissioners who serve short terms may not even learn the basics.

“It’s going to take you a year or two just to figure out what you’re doing,” says Tommy Shepherd, gaming attorney and partner at South Carolina-based law firm Jones Walker LLP. “If you have two-year terms and a continuous rotation, you really don’t have a base of knowledge or the experience level to question whether something is the right decision or not.”

“To populate all these regulatory agencies with people who know nothing about gambling is a really bad idea for a lot of reasons.” —Tony Cabot, Gaming Law Advisory Council, Boyd School of Law, University of Nevada, Las Vegas

In that case, he adds, “You’re going to have to take the recommendations of staff.”

Which may not be a bad thing altogether. Mississippi’s three gaming commissioners—including a lawyer, a banker, and the owner of a group of convenience stores—don’t pull down six-figure salaries, but get a $40 per diem 12 times a year, for an annual total of $480.

“So to expect them to be extremely knowledgeable about the industry from the start is not realistic,” says Shepherd. “But it can work if they’re honest, above-board people who take the time to learn, meet with members of the industry and get educated on the issues, and are backed up by a very professional, deep staff.

“While they’re the ultimate decision-makers, there is typically a staff that works at it day to day and makes the recommendations; in that case, I’m less troubled by commissioners or board members being unfamiliar with gaming,” says Shepherd. “But it has its merits and demerits to get information funneled only through staff. That’s not healthy either.”

A simple solution in such cases: talk to more seasoned regulators from other states, hire professional consultants, or both.

“At G2E, I tried to make sure that regulators from some of the newest jurisdictions, the ones whose staff members may not have a lot of gaming experience, were introduced to regulators with more gaming experience,” says Shepherd. “‘Hey, do you know the folks from Mississippi? Do you know the folks from Louisiana? Do you know the folks from Virginia? Do you know the folks from Tennessee? You all need to talk.’

“If you have that face-to-face introduction, it’s much easier to pick up the phone and say, ‘Hey, we’ve got this issue pending that we’ve never faced. How would you guys look at this?’”

Cabot agrees that seasoned staffers may bring “a ton of institutional knowledge” to advise new appointees and get them past the learning curve, “as long as all parties are willing to share their knowledge, experience and expertise.” In that scenario, a non-gaming professional with expertise in related matters can even be beneficial, “almost like bringing in an outside member of a board of directors who’s good at auditing or finance.”

“The worst circumstance,” he says, is when a person takes the job for the prestige, the pay, to bump up a government pension, or to do the bidding of higher-ups.

“Sometimes they go into that position viewing how they act within the construct of the political atmosphere in which they’re appointed,” says Cabot, “making decisions based on friendship or politics. There have to be checks and balances.”

Technical Difficulties

The work is more challenging in the digital-first era. Mobile sports betting and online betting are intricate technologies that can’t be grasped quickly. But in states that need money, there can be a race to get the cash cow market-ready.

“They legalize sports betting, then some politician says, ‘We’re going to be open by New Year’s, or football season, or the Super Bowl, or March Madness,’” says Schuetz. “What they should say is, ‘We’ll open when the regulatory agency’s ready.’” To do otherwise can “damage the industry and detract from its ability to be sustainable.”

“It can work if they’re honest, above-board people who take the time to learn, meet with members of the industry and get educated on the issues.” —Tommy Shepherd, gaming law attorney and partner, Jones Walker LLP

In August, Massachusetts Governor Charlie Baker signed a bill to legalize sports betting. Since then, gaming commissioners have debated issues of licensing, consumer protections, advertising rules, responsible gaming programs and the like, as well as launch dates. Commission spokesman Tom Mills told news station WBUR that the team needs to formalize “over 200 regulations.”

Fans are pushing for a speedy launch, and lawmakers certainly want to start reaping the estimated $60 million in projected annual revenues that could come from the bets. Commissioners Brad Hill and Jordan Maynard want to go live by Super Bowl LIV in February. But Commissioner Nakisha Skinner has questioned what she called an “aggressive” push to open.

“If this compressed timeline makes sense and it’s responsible, I’m all for it,” Skinner said. “I just need to understand the rationale for why there’s this compressed timeline being advanced, as opposed to a reasonable timeline by which the team can get this done.”

In response, Boston sportscaster Mike Mutnansky tweeted, “The people don’t seem excited about a timeline that might not allow for legal sports betting in Massachusetts in time for the Super Bowl.” To which a follower replied, “Complete group of bozos running this state.”

Interestingly, a voice of reason came from sports fan Liam Arnason, a student at the University of Massachusetts, who told Springfield news station WWLP, “I think it is faster than I expected… I think it’s cool, but at the same time, it has to be standardized.”

Getting It Right

Shepherd calls Virginia a great example of a relatively new jurisdiction that’s done it the right way.

“They got the expertise they needed when they realized they didn’t have it in-house.” Among the recruits: Gina Smith, former Maryland Lottery and Gaming Control Agency (MLGCA) executive, who was tapped to serve as the Virginia Lottery’s new deputy director for gaming compliance, and Bob Fontaine, former principal counsel for the MLGCA, as deputy general counsel for casino gaming and sports betting regulations.

Those appointments, among several others, “gave them a tremendous leg up on not only regulating the industry the right way, but doing the investigations the right way, bringing mobile sports wagering up very quickly and getting the revenue stream going for the state,” says Shepherd.

Similarly, in Florida, a new gaming commission was created in May 2021 after lawmakers passed a new compact with the Seminole Tribe. At the body’s first formal meeting, Louis Trombetta, director of the Division of Pari-mutuel Wagering at the Department of Business and Professional Regulation, beat out two other finalists to be named executive director.

Commenting on the appointment, Commission Chairwoman Julie Brown said, “Having gaming experience is helpful,” as is “having legal experience, knowing that rulemaking is going to be a critical component of this commission.”

Along with minimum standards (at least) for commissioners, Shepherd says there should be “some sort of consistency of regulation from jurisdiction to jurisdiction.

“It doesn’t mean they have to be identical, but if an issue is multi-state in nature, let’s say for mobile sports wagering, you don’t want one jurisdiction to jump out in front and fine someone a gazillion dollars, because that makes other regulators feel like they have to do the same thing.

“There should be some consistency in reaction to incidents—‘Have we fixed the problem? Will it happen again?’—versus a knee-jerk reaction to really punish these people.”

Until such time, in some cases gaming commission appointments may continue to be perks for the privileged or golden parachutes for termed-out government workers. Cabot says the perception that gaming insiders may be biased is no longer legitimate. “Today, with the industry as big as it is, there’s really quite a large talent pool, big enough to find the best qualified regulators.” It should be no problem for states to identify, evaluate and sanction regulators who can fulfill their duties with expertise and integrity.

Or as Schuetz wrote in a January 2021 column for this publication, those making the appointments should “work to secure talent who actually can understand the complexity of the industry.

“Too many jobs, tax dollars and economic activity are involved to make this a dimension of the political nonsense that plagues so much of our country. Moreover, expecting lay people to understand the complexity of the modern gaming industry is a stretch goal that has a small likelihood of success.”

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