Virginia Gov. Terry McAuliffe Should Seek These 5 Amendments Before Signing Daily Fantasy Sports Bill

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Terry McAuliffe

Virginia is poised to become the first state to formally legalize and regulate certain kinds of fantasy sports betting after the State Senate passed SB 646 on February 26.

Bill tracking available here, fiscal impact study here, full text here.

In an email to members, Fantasy Sports Trade Association (FSTA) head Paul Charchian asserted that the bill “is expected to be signed by Governor Terry McAuliffe.”

Instead of signing, I urge Gov. McAuliffe to amend the bill in the following ways in order to better serve both the Virginians who play fantasy sports for real money and the majority of companies who serve those players.

Greater protection for player funds

SB 646 requires that operators “[s]egregate player funds from operational funds in separate accounts and maintain a reserve in the form of cash, cash equivalents, irrevocable letter of credit, bond, or a combination thereof in an amount sufficient to pay all prizes and awards offered to winning participants.”

That sounds good on face, but weakens under closer examination:

  1. The bill does not define “player funds,” resulting in a potentially exploitable ambiguity. More about why defining player funds isn’t as straightforward as it seems.
  2. The bill does not require operators to communicate clearly to players how their funds are protected and what would happen to their funds in the case of insolvency, if the operator was a victim of fraud, and so on.
  3. The bill does not articulate a process for returning player funds in the case of account of site closure.
  4. The primary mechanism the bill provides for uncovering a failure to comply with the segregation requirement is an annual audit conducted by a third party of the operator’s choosing.

To borrow a phrase from Martin Shapiro, fantasy sports player funds “will be segregated but not protected” under SB 646.

Some examples of how other jurisdictions handle the protection of player funds:

Here’s a model federal online poker bill with a number of good ideas for additional language around the nuances of player fund protection (process for an orderly shutdown of licensed operators, etc). The proposed DFS regulations in Massachusetts also articulate necessary sections (e.g., refunds in cases of closed accounts) missing from SB 646.

Increased problem gambling protections

SB 646 includes one problem gambling proviso: operators must “[a]llow individuals to restrict themselves from entering a fantasy contest upon request and take reasonable steps to prevent those individuals from entering the operator’s fantasy contests.”

The official position of the National Council on Problem Gambling (NCPG) regarding DFS – the organization “believes fantasy sports contest participants are at high risk to, and do, develop gambling problems” – strongly suggests that this single condition is insufficient.

The NPGC has published a proposed responsible play amendment for DFS bills. SB 646 should be amended to include both the NCPG’s suggestions and dedicated funding for support and research.

More robust oversight of industry

The agency charged with overseeing fantasy sports is the Department of Agriculture and Consumer Services (DACS). The DACS also oversees charitable gambling in Virginia, while pari-mutuel wagering is overseen by the state Racing Commission.

Operators must register with the DACS. SB 646 provides guidelines, but not requirements, for approving operator applications.

SB 646 does not appear to provide DACS with the ability to promulgate additional regulations regarding fantasy sports. This is in contrast to the powers granted to the DACS to oversee charitable gambling, where state regulators “have the power to prescribe regulations and conditions under which such gaming shall be conducted to ensure that it is conducted in a manner consistent with the purpose for which it is permitted.”

DACS also appears to lack the ability to act proactively to ensure operator compliance prior to the emergence of a problem.

The agency is also forced to employ the court system to access operators records and systems that would be available on-demand as a matter of course to gaming regulators overseeing land-based casinos or online poker sites in NJ.

At a minimum, the DACS:

  1. Should be granted powers similar to those it enjoys to oversee charitable gambling.
  2. Should be provided on-demand access to operator systems and critical data points (e.g., player funds liabilities).
  3. Should receive a stream of funding from operator revenue – not registration fees – to support the development and ongoing funding of an individual position or team dedicated to fantasy sports oversight.

Narrower definition of “fantasy contest”

The definition of “fantasy contest” offered by SB 646 is unnecessarily broad and could generate significant unintended consequences.

I recently argued that the language in Virginia’s bill – and over a dozen others – could unintentionally legalize (at least at the state level) a far broader class of betting activity that lawmakers may appreciate.

As a result, I would propose two changes to the definition:

  1. The language should be tightened considerably, and what powers can reasonably be given to the DACS to modify the definition should be explicitly given.
  2. Additionally, operators should be required as a condition of licensing to submit games that deviate materially from the standard fantasy sports / daily fantasy sports game to DACS for approval prior to launch.

Restructured registration fee

SB 646 sets the initial fee for application at $50,000 and the renewal fee (licenses are good for one year) as TBD.

I believe the one-size-fits-all fee does not comport with the spirit of the bill, which is to provide the greatest number of consumers with the most comprehensive protections.

The fee and the additional compliance overhead SB 646 requires (e.g., annual lab certifications and audits) exercise a disproportionate impact on smaller operators.

Instead, I would propose:

  1. That the registration fee be tied to the cost of investigation of the application, as larger companies will likely involve more complex and costly investigations.
  2. That a portion of all costs that the DACS should naturally incur during the process of carefully overseeing the industry be covered by a small excise tax on entry fees an operator receives from within the state.

One last thought

§ 59.1-566 of SB 646 – “Registration not endorsement” – is a curious section that, to me, encapsulates the general issue with SB 646. It reads:

No registered operator shall use or exploit the fact of registration under this chapter so as to lead the public to believe that such registration in any manner constitutes an endorsement or approval by the Commonwealth.

Isn’t that exactly what regulation is meant to accomplish?

Image credit: Miller Center.