Gaming Policy Models, Pt. II: Regulatory Organization

Article originally appeared in Gaming Management on 08/25/10

In the last issue of CEM, my law partner Tony Cabot discussed the gaming policy issues a jurisdiction should consider if it is looking to legalize gaming. This month, I'll address aspects of gaming regulatory structure.

I have some direct experience in this regard, as I was involved with the regulatory start ups of the Iowa Racing and Gaming Commission and the Mississippi Gaming Commission. I also provided input to the government of Switzerland concerning amendments to their gaming law. Most recently, I provided comments to the Republic of Ireland, which is now considering changes to its gaming regulatory structure.

It is vital that a new gaming regulatory agency be set up in a manner that both provides strong comprehensive regulatory authority in one agency and organizes that agency with checks and balances, so that one facet does not have too much control.

A significant reason that comprehensive regulatory authority is a good idea is that having other agencies peripherally and indirectly regulating gaming operations can lead to turf wars and regulatory uncertainty and instability. Examples of situations to avoid would be local gaming licenses (in addition to the main licensing process) and having another agency be responsible for casino internal controls. For instance, while it is logical in a regulatory schematic to allow local jurisdictions to handle local zoning and use permit concerns (these are land use issues, not gaming issues per se), allowing the localities to have their own gaming license authority would be redundant and lead to possible inconsistent determinations.

Checks and balances are also important, as the public and the industry need to be assured that the gaming regulatory process is fair and above board. The impression that a jurisdiction could have a “gaming czar” who single handedly would be responsible for directing an investigation and then also making the definitive licensing decision is not appropriate.

Obviously, a new gaming regulatory agency needs full-time staff to handle the responsibility of investigation, enforcement, administration and auditing the industry’s activities in a new jurisdiction. This gaming staff should be full time and should have the authority to make recommended actions (concerning licensing, discipline and other matters) to a body that formally votes to take action on such items.

Typically, the agency that takes this type of action is called a gaming commission. Gaming commissioners are usually appointed by a state’s governor and confirmed by the state legislature. Gaming commission appointments should be part-time positions. Usually there are five members to such a body, but I have seen as few as three and as many as seven.

It also would be advisable to require a balance in selecting commissioners. Some states require a balance between political parties, thereby requiring a governor to appoint someone from an opposing party, which is a good way to provide checks and balances to the overall gaming regulatory framework. I have also seen jurisdictions that require balancing the commission with members from different regions of a state. It also may be wise to require that commissioners represent different professions (e.g., law, accounting, banking/finance, law enforcement).

As for the full-time staff, what is most often seen, and which has been shown to be quite workable and effective, is for there to be one full-time executive director with overall responsibility for the staff. Typically, this is a position hired by the part-time gaming commission. If that agency is balanced as referenced above, it provides another layer to de-politicize the position and achieve another check and balance.

The executive director then typically would have the authority to hire a deputy director, or deputy directors, to assist with the administrative function, as well as directors who would head the investigative, enforcement and audit functions of the agency.

Some state statutes provide that the state’s existing law enforcement department do the background investigations and/or serve in an enforcement role. Even if this is the case, however, in terms of the protocol for licensing/disciplinary settings, it works the same as if the function is served in house. That is to say, the agents do the investigation and write up a report that ultimately goes to the executive director, who then makes a recommendation to the gaming commission, which then makes the decision.

Another way to assure that there are adequate checks and balances is to have the role of legal counsel to the agency be served by the state’s attorney general’s office, as opposed to allowing the executive director to hire counsel directly. This means that the attorney general’s office selects the counsel, which provides another level of regulatory transparency and compliance.

One issue that can get overlooked when gaming is legalized is providing for a gaming laboratory to check and verify that the software in the slot machines, gaming systems and other associated equipment works properly. One solution is for the agency to create its own gaming lab and perform this function in house. However, this has not worked very well for newer jurisdictions in that it has proved difficult to attract and retain qualified personnel.

As such, most of the newer jurisdictions have farmed out this function to third-party laboratories. The cost of this function is then passed along in total to the gaming licensees. In some instances, jurisdictions have required these labs to be licensed; in other instances, a confidential contract has sufficed. Some jurisdictions will designate a specific position to fulfill software administrative, monitoring, and compliance efforts, with that individual interfacing with the third-party lab(s).

Another reason for having the aforementioned checks and balances in a regulatory structure is that this type of structure is fairly standard for the industry. This provides comfort to other gaming regulators and to the industry as a whole that it would be acceptable for an established gaming company to do business in the new jurisdiction.

In addition, Nevada and Mississippi have what are called “foreign gaming” requirements, with “foreign” being defined as any jurisdiction other than their state. These requirements essentially require a Nevada or Mississippi licensee to conduct business in other gaming jurisdiction at the same level and with the same operating standard as Nevada or Mississippi. There are ongoing reporting and monitoring requirements in this regard.

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