Nevada Gaming Authorities Release Proposal to Regulate Internet Poker

On Aug. 24, 2011, the Nevada State Gaming Control Board issued a set draft of regulatory proposals intended to establish the state regulation of Internet poker pursuant to Assembly Bill 258 (AB 258) of the 2011 Nevada Legislature.

Signed into law by Gov. Brian Sandoval in June 2011, AB 258 requires that the Nevada Gaming Commission adopt regulations governing interactive gaming. Though Nevada already has legislation on its books permitting the commission to regulate this activity1, AB 258 goes further by mandating the commission to enact the regulations by Jan. 31, 2012. This new push for regulation is not only supported by the state’s governmental leaders, but also its gaming regulators, including

Chairman of the Board Mark Lipparelli, who recognized not only the potential revenue, but also the opportunity for Nevada to establish itself as a leading regulator of Internet gaming in the United States, should the federal government legalize such activity.

At the time of writing, the board had published five separate regulatory drafts.2 Many of the drafts were simply amendments to update existing regulations to add specific language regarding Internet gaming. For instance, draft Regulation 4 amends Regulation 4.030 to provide that a manufacturer’s license includes a manufacturer of interactive gaming systems, to provide for an operator of interactive gaming license and to provide for a service provider license. The new categories of licenses for “operator of interactive gaming” and “service provider” authorizes the holders to “from Nevada, engage in the business of operating interactive gaming” and “act as a service provider and includes an interactive gaming service provider,” respectively.3

The regulatory drafts also include a new regulation, namely, Regulation 5A, “Operation of Interactive Gaming,” which creates the comprehensive framework to govern the operation of interactive gaming in the state of Nevada. Under Regulation 5A, only a person from Nevada may act as an operator of interactive gaming, and only if that person holds a license specifically permitting the person to act as an operator of interactive gaming (an “operator”).4 Additionally, an operator shall not operate a new interactive gaming system in Nevada unless the system has been approved by the commission.5

The regulation further provides that a licensed interactive gaming service provider may act on behalf of an operator. An “interactive gaming service provider” means a person who acts on behalf of an operator of interactive gaming and:

(a) Manages, administers or controls wagers that are initiated, received or made on an interactive gaming system;
(b) Manages, administers or controls the games with which wagers that are initiated, received or made on an interactive gaming system are associated;
(c) Maintains or operates the software or hardware of an interactive gaming system;
(d) Provides the trademarks, trade names, service marks or similar intellectual property under which an operator of interactive gaming identifies its interactive gaming system to patrons;
(e) Provides information regarding persons to an operator of interactive gaming via a database or customer list; or
(f) Provides products, services, information or assets to an operator of interactive gaming and receives therefore a percentage of gaming revenue from the establishment’s interactive gaming system”6 (“service provider”).

A service provider that acts on behalf of an operator is subject to the applicable regulatory provisions to the same extent as the operator. The operator, however, continues to have an obligation to ensure, and remains responsible for, compliance with the regulations regardless of its use of a service provider.7 Failure to comply with the provisions of Regulation 5A shall be an unsuitable method of operation and grounds for disciplinary action. The commission may limit, condition, suspend, revoke or fine any license, registration, finding of suitability or approval given or granted under this regulation.

Regulation 5A also prevents operators from accepting or facilitating wagers on any game other than poker or its derivatives as approved by the chairman of the board; thereby significantly curtailing the parameters of interactive gaming.8 Poker is defined as “the traditional game of poker, and any derivative of the game of poker, as approved by the chairman and published on the board’s website, wherein two or more players play against each other and wager on the value of their hands.”9 Poker does not encompass games where players wager against the house, like in blackjack, craps or roulette.

Equally important is the limitation on where an operator may offer interactive gaming. Specifically, an operator shall not offer interactive gaming to individuals located in jurisdictions outside the state of Nevada unless the commission has determined:

(a) That a federal law authorizing the specific type of interactive gaming for which the license was granted is enacted; or
(b) That the board or commission is notified by the United States Department of Justice that it is permissible under federal law to operate the specific type of interactive gaming for which the license was granted.

Upon the commission making a determination that (a) or (b) has occurred, an operator that intends to offer interactive gaming to individuals located outside Nevada shall first submit a request for administrative approval to the chairman. The chairman will then make a determination as to whether the proposed operations comply with all applicable state and federal laws.

Regulation 5A also addresses a variety of other topics including: internal controls; detection and prevention of criminal activities; registration of individuals to engage in interactive gaming; investigative and licensing fees; record keeping, self-exclusion, and information that must be on an interactive gaming website; resolution of disputes; and grounds for disciplinary action. Some of these aspects that are of particular importance include:

• Before allowing or accepting any wagering communication from an individual to engage in interactive gaming, an operator must register the individual as an authorized player and create an interactive gaming account for the individual. In order to register an individual as an authorized player, the operator must establish and verify: the identity of the individual; that the individual is 21 years of age or older; the physical location where the individual resides; and that the individual is not on the list of excluded persons.

• The chairman shall adopt minimum standards. These minimum standards shall include internal controls for: administrative, accounting and audit procedures for the purpose of determining the licensee’s liability for taxes and fees under the Gaming Control Act; identifying and verifying authorized players; maintaining the security and integrity of the interactive gaming system; ensuring that gaming is engaged between human individuals only; and protecting an authorized player’s personally identifiable information. Each operator must comply with these standards.

• Operators must implement procedures that are designed to detect and prevent transactions that may be associated with money laundering, fraud and other criminal activities and to ensure compliance with all federal laws related to money laundering.

• Operators must keep exact histories of every hand played on file for five years, including the players involved in the games, the wagering and other details.

• Operators will be taxed at the same rate the state taxes gambling regulators in casinos statewide, unless federal law otherwise provides for a similar fee or tax.

• Authorized players may deposit funds into their interactive gaming accounts by a variety of methods including credit cards, cash, checks, wire transfer and money order deposits. Operators must hold such deposited funds in accounts separate from the operator’s own property.

• Operators must adopt, display and adhere to written, comprehensive house rules governing wagering transactions by and between authorized players. Such house rules shall include a clear and concise explanation of all fees, the rules of play, any monetary wagering limits, and any time limits pertaining to the play of a game.

• The chairman shall have the power to issue an interlocutory stop order to an operator, thereby immediately suspending the operation of its interactive gaming system for any cause deemed reasonable by the chairman.10

Also worth noting is the expansion to Regulation 14. As proposed, draft Regulation 14 amends the definitions of “manufacture” and “cashless wagering system” and provides definitions for “equipment associated with interactive gaming,” “interactive gaming system,” “manufacturer of equipment associated with interactive gaming,” and “proprietary hardware and software.”

While the term “interactive gaming system” is currently used in the Gaming Control Act and the regulations promulgated thereunder, including in defining the term manufacture, the term itself had yet to be defined. Accordingly, Regulation 14.010(10) now defines the term “interactive gaming system” as “a gaming device and means the collective hardware, software, communications technology, proprietary hardware and software used by an operator of interactive gaming to operate interactive gaming. The components of an interactive gaming system must be located in the state of Nevada except as otherwise permitted by the chairman or his designee.” Moreover, the draft text elaborates upon the term of “manufacture” to include the designing, building or controlling of “proprietary software or hardware,”11 which is defined as “hardware or software specifically designed for use in a gaming device including a mobile gaming system and interactive gaming system.”12 Based on these amendments and additions, the draft regulation now clarifies what constitutes interactive gaming systems and who needs to be licensed.

Additionally, any person that manufactures, assembles or produces any equipment associated with interactive gaming, shall be required to register with the board and may be required by the commission, upon recommendation of the board, to file an application for licensure as a manufacturer of equipment associated with interactive gaming.13

Finally, Regulation 14 expands the term “cashless wagering system” to include “the collective hardware, software, communications technology and other associated equipment used to facilitate wagering on any game or gaming device including mobile gaming systems and interactive gaming systems with other than chips, tokens or legal tender of the United States …” (emphasis added.) Pursuant to the Gaming Control Act, persons who manufacture cashless wagering systems are required to obtain a non-restricted gaming license.14 As a consequence, the expansion of this term to include mobile gaming and interactive gaming will require more persons to undergo licensing.

The commission is expected to approve the regulations in December. Prior to the approval, however, the board will hold public workshops to hear testimony and garner input to make revisions before the commission votes. As noted by Lipparelli, “This will be a rigorous process and these regulations will, no doubt, undergo a good deal of revision.”

In conclusion, while the next couple of months will certainly bear witness to numerous alterations to the regulations before being approved, the underlying objective of ensuring that Nevada is well positioned should federal legislation pass will remain.

Authors’ Note: Please feel free to contact the authors if you have any questions regarding the proposed regulations or if you would like to be advised of the latest updates to the proposed regulations.

1 AB 466 of the 71st Session.
2 This article is written as of Aug. 30, 2011.
3 Draft NGC Regulation 4.030(6) and (7). Draft date Aug. 1, 2011.
4 Draft NGC Regulation 5A.020(7). Draft date Aug. 1, 2011.
5 Id. at 5A.060.
6 Id. at 5A.020(4).
7 Id. at 5A.220(1).
8 Id. at 5A.140.
9 Id. at 5A.020(8).
10 See Draft NGC Regulation 5A.
11 Draft NGC Regulation 14.010(16). Draft date Aug. 1, 2011.
12 Id. at 14.010(26).
13 Id. at 14.020.
14 See NRS 463.650.