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The Path Forward for DFS

How fantasy sports sites can survive the storm and emerge healthy and prosperous

The Path Forward for DFS

A lot has been written about the fantasy sports industry (and particularly daily fantasy sports) in the last few months. Is it gambling? Is it legal? What did Congress intend by creating a carve-out in the Unlawful Internet Gaming Enforcement Act (UIGEA)?

Should it be outlawed? Should it be regulated? Should it be taxed? Is it too big to fail? Have there been advantages to industry employees with inside information?

There are advocates on both sides of almost every issue that has been discussed, and persuasive arguments can be made no matter which side of these issues you seek to address. At this point, the fantasy sports operators likely regret the aggressive advertising campaign that they engaged in this year. Having invited increased attention, they have found themselves scrutinized beyond their wildest dreams.

Understandably, these operators are spending much of their time reacting and defending themselves on multiple fronts. Lost in this onslaught has been any meaningful discussion of some key issues that matter. First, looking forward, how can consumers and society be best protected? What issues need to be addressed to assure this protection?

Based on its widespread popularity, it is clear that fantasy sports (whether legal or illegal, regulated or not regulated) are here to stay. Any attempt to completely outlaw this popular activity will lead to the same debacle that has occurred with illegal sports wagering in this country, where over $140 billion is estimated to be wagered this year through illegal bookies, according to the American Gaming Association.

This type of widespread illegal enterprise creates huge societal problems allowing for the growth of organized crime, terrorism funding and money laundering activities, as well as a lack of consumer protections, such as responsible gaming, accessibility to minors, technological safeguards and fair play.

To avoid this, some sort of oversight system needs to be developed, whether it be a governmental regulatory system (or multiple systems in different jurisdictions) or a form of industry self-regulation, similar to what the financial industry in the U.S. has established by creating the Financial Industry Regulatory

Authority (FINRA), which regulates brokers and exchange markets.

On Tuesday, October 27, the Fantasy Sports Trade Association announced that it will be forming the Fantasy Sports Control Agency (FSCA), an independent body to regulate the developing industry. The FSCA will be headed by former U.S. Secretary of Labor and prominent legal scholar Seth D. Harris. In addition to serving in the Obama administration, Harris was the director of New York Law School’s Labor and Employment Law programs and visiting professor at Seton Hall Law School, where he focused his research on issues involving federal labor, disabilities and employment discrimination policy.

Harris’ accomplishments in both the legal and public sectors should provide the FSCA with strong guidance as it develops industry standards, internal controls, auditing and enforcement mechanisms.

Although some in the fantasy sports industry are pursuing an independent non-governmental regulatory body, many jurisdictions continue to explore the possibility of developing a regulatory structure. On November 11, Massachusetts Attorney General Maura Healey announced that she intends to have proposed regulations for the industry developed by the end of the year. On the same day, American Gaming Association President and CEO Geoff Freeman stated:

“The gaming industry wishes to see this product succeed and to partner where appropriate. State-by-state legal clarity and consumer protections are necessary prerequisites for daily fantasy’s success and future collaborations between our industries.

“As we move forward, the AGA will work with law enforcement, sports leagues and other interested parties to consider effective approaches that protect consumers and the integrity of sports.”

State attorney general offices have begun to officially weigh in on these decisions in Nevada and New York, and other public bodies are conducting independent reviews. Illinois and New Jersey lawmakers have stated that they have or will introduce legislation seeking to regulate the activity.

The broad attention to regulatory oversight will result in a wide variety of approaches, although all will likely include some general standards of gaming regulatory policy.

Sound Oversight Structure

Whether the industry oversees itself or if at some point the government gets involved, any sound system that provides the necessary protections to consumers and to society will structurally have five key components:

1. Due Diligence/Licensing Standards; 2. Game Integrity and Consumer Protection Standards; 3. Internal Control Systems; 4. Audit and Enforcement Systems; and, 5. Due Process Protections.

All of these components commonly exist in the myriad state jurisdictions in which the casino gaming industry, the horse racing industry and the lottery industry have operated, and provide a good model for the fantasy sports industry.

Some jurisdictions have begun establishing policy for fantasy sports and other similar contests, though there are not yet any extensive fantasy sports regulatory structures in place. New Jersey has authorized fantasy sports tournaments for promotional purposes, but the jurisdiction has not yet put forth any detailed rules on the operation of such activity.

Nevada recently passed Senate Bill 9, which authorizes the gaming regulators to permit skill-based games on the casino floor, and the state is currently drafting regulations to govern such activity. Both of these regulatory systems have focused on systems to be used if the casinos are involved in the activity, rather than looking at it on a stand-alone basis. 

Due Diligence and Licensing Standards

To protect society and consumers, some mechanism needs to be developed to assure that criminal elements and unscrupulous individuals who have engaged in illegal activities do not get involved in the industry.

Most jurisdictions have done this by developing licensing standards to keep these people out of the industry. The due diligence process involves extensive background checks on all the parties involved.

Independent oversight into the background and experience of key operational professionals has allowed the traditional gaming industry to assure those with the potential to use gambling for illegal purposes are kept out of the industry. Minimum personal character, professional experience and financial benchmarks are common standards throughout the industry, and have resulted in businesses operated by upstanding, talented individuals.

Legal and Societal Standards

To qualify for the carve-out under UIGEA, fantasy sports games need to meet certain specific criteria. These include notifying players of the specific prizes in advance of the competition, that the fantasy teams are not made up of only players from a single real-life team, and that the contest is determined not by any single team or athlete’s performance in a single real-life contest.

For the fantasy sports industry, it will be key for any oversight system to make sure that the games involved meet these standards.

To ensure integrity, the traditional gaming industry has turned to public and private gaming labs to test each gambling game and game component prior to its introduction for play. Gaming Laboratories International, which provides independent testing services to governments and to game suppliers in the casino industry, released a white paper in July 2015 outlining the benefits of testing and lab certification standards for fantasy sports operators that would help assure proper protections.

In addition to meeting the UIGEA standards, it will be important for there to be oversight to assure that all gambling activity is conducted in a safe, fair and predictable manner. The integrity of each fantasy game is crucial to both regulatory and industry success by assuring consumers that those games are not unfairly adjusted in favor of a single party.

Some fantasy sports operators which maintain gambling operation licenses in Great Britain, such as DraftKings, have been exposed to regulatory efforts to ensure game integrity. Great Britain’s Gambling Commission published its “Sport and Sports Betting Integrity Action Plan” in September 2015, which outlines a broad strategy to promote integrity in sports betting activity.

The plan includes goals and suggestions for participants across the industry for cooperative monitoring and reporting of potential sports integrity issues.

Although a comprehensive list of issues to be addressed to assure game integrity and consumer protection is beyond the scope of this article, the broad categories of issues that need to be addressed include the following:

Age and Identity Verification. As the fantasy sports market is currently based online, age and identity protections are a necessary step to ensure that a player’s identity can be confirmed, and that underage individuals are not engaged in the activity.

Transparency of Rules. While the basic game play in fantasy sports is widely known—drafting multiple players whose individual performances will be aggregated into a total team score—the specific scoring calculations, team composition requirements and other factors have dramatically evolved since the introduction of the activity years ago. Certain fantasy leagues or contests may have rule nuances that are not readily explained to a new player, and that can result in a consumer not fully understanding the nature of the contest. It is important that full disclosure of these nuances is made as a basic means of consumer protection.

Insider Knowledge. Access by a select few to insider knowledge of betting trends, odds and game conditions can greatly affect the public’s confidence in fantasy sports activity.

In September and October, the New York Times ran a series of articles outlining instances of employees of fantasy sports operators using their considerable inside knowledge of betting patterns to win contests on competitor websites. This resulted in a decline in revenues for the industry, as some participants lost confidence.

At the very least, access to such knowledge creates the appearance of impropriety and diminishes consumer confidence in the conduct of games. Some major fantasy sports operators have since instituted corporate policies attempting to curtail and eliminate the activity, including expanding participation bans to employee family members in line with traditional gaming practices.

These are commendable steps, but further attention can cut off additional insider opportunities beyond merely employees and their families.

Integrity Issues with Sporting Events. A key issue that needs to be considered and addressed is what should happen in the event the integrity of a certain sports outcome comes into question. If I select a player as my fantasy quarterback, and later a question arises as to the integrity surrounding that player’s performance, clear standards need to exist with regard to how the issue will be dealt with in a way that is both transparent and fair to the consumers involved.

Responsible Gaming. The potential for problem gambling issues in fantasy sports activity was recently recognized by the National Council on Problem Gambling. On October 8, the council adopted a resolution which stated that it “believes fantasy sports contest participants are at a high risk to, and do, develop gambling problems (and) calls on companies offering fantasy sports contests to develop gambling-related consumer protections using the NCPG GRADE guidelines as a foundation.”

To be responsible to society and to protect the consumer and public, it is vitally important for the fantasy sports industry to make a big commitment to assure responsible gaming standards are met.

Know Your Customer and Anti-Money Laundering Protections. Given the countless number of transactions, wagers and accounts maintained by fantasy sports operators, it is vitally important for them to follow the “know your customer” and anti-money laundering requirements that other financial institutions must meet. This involves extensive employee training, and steps being taken to assure that neither organized crime nor terrorist groups end up using the fantasy sports sites as a way of laundering money.

Given that financial institutions offering credit cards are permitted (under UIGEA) to process fantasy sports transactions, many of these compliance steps with the anti-money laundering regulations are likely occurring at the financial institution level. It is important for the fantasy sports operators to take steps to assure that they have internal standards in place to assure such compliance no matter how the financial transaction gets processed.

Internal Control Standards. The gaming industry has, through strong regulatory oversight, made strong internal control procedures a standard practice for businesses operating in the space. By adopting model procedures, approving individualized business practices or creating required practices, regulators have created an atmosphere that allows gaming operators to self-police and report compliance violations in addition to their traditional, larger oversight role.

This ensures that operators can closely monitor day-to-day compliance goals while regulators devote greater resources to macro-level investigations and reviews. Patrons are also provided with a measure of confidence that operations meet minimum industry standards that protect game play.

Audit and Enforcement Systems. Once all the licensing and due diligence, game integrity, consumer protection and societal protection standards are fully developed, and internal control systems are put in place to assure self-regulation by operators, some form of independent review or “audit” function is necessary to provide the public with the assurance of compliance with these standards.

If problems are discovered, some form of method of addressing the shortcomings is necessary, i.e. an enforcement system.

To sustain itself, the fantasy sports industry needs to do more than simply hire an advocate (law firm) or advocacy group (trade association) to reassure the public on these points. Some form of independent review by a party that is not under control of the operator is necessary for the industry to have credibility with the public, and to assure that society is adequately protected.

This does not necessarily mean that there needs to be governmental involvement. A properly empowered entity with appropriate independence can address this need, much like FINRA has for the financial services industry, or the gaming laboratories have done for slot machine testing industry.

Due Process. Due process is the cornerstone of our legal and regulatory systems, and is designed to ensure that all individuals enjoy the ability to have concerns addressed in a uniform manner by impartial parties.

The terms of use for at least one of the major fantasy operators seek to accomplish this through standard arbitration clauses—a good start, though there are opportunities for improvement. Another major operator allows for all dispute resolution to be made by the operator at its sole discretion. Clearly, if the dispute is with the operator, this would not seem to be an adequate form of due process.

Independent evaluation and adjudication is key to providing the due process protections for consumers in this new industry. Hearings by unbiased third parties, with appeal procedures, ensure that consumers’ voices are heard in a fair and objective manner. This type of due process should be available not only for patrons, but also for those denied participation in the industry for failing to meet set standards.

Benefits of Protections

To be successful in the long term, the fantasy sports industry will need to proactively take steps to dispel developing myths and to assure accountability to the consumer and to the public at large. This can best be done by developing systems to address the five prongs of proper oversight outlined in this article.

These concepts are proven through the casino gaming industry’s dramatic growth and acceptance since its first development in 1930s Nevada and its continued expansion throughout the world.

Proper oversight, whether through an independent body or government agency, has boosted public confidence in institutions such as the financial markets and the traditional casino industry, and ultimately contributed to their development.

Fantasy sports operators now have the opportunity to shape the industry by adopting similar oversight practices. The recent announcement that an independent regulatory body, the FSCA, will be established is a big step in the right direction, and should be applauded.

David Waddell is an attorney and president of RMC Legal. Waddell’s areas of practice include gaming law, business, tax and municipal law. You can reach him at 517-507-3859, waddell@rmclegal.com, or online at rmclegal.com. Dustin Ford is an attorney with RMC Legal, and assists casino clients with compliance, regulatory and legal needs affecting the industry at large. He can be reached at 517- 999-5414, dford@rmclegal.com, or online at rmclegal.com.

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