The Expanding Umbrella of Nevada Regulation

When it comes to gaming regulation, what starts in Nevada often expands to other jurisdictions. That makes it important for gaming businesses worldwide to watch when Nevada changes how it regulates the industry. At the closing of the 2015 Nevada legislative session, one change worth tracking is that Nevada has expanded the scope of activity subject to mandatory regulation by the Nevada State Gaming Control Board and Nevada Gaming Commission. Specifically, Nevada regulators now have broadened jurisdiction to license associated equipment manufacturers as well as those involved in the nightclub/day club industry when the club is located on a casino premises.

Associated Equipment Manufacturers
In Nevada, “associated equipment” has been generally defined to be equipment or a component used directly or indirectly with a gaming device, gambling game or race and sports book operation.1 Traditionally, associated equipment manufacturers were subject to discretionary licensing, while the equipment itself was subject to regulatory approval.2 In comparison, “gaming devices” have been generally defined as any object used remotely or directly in connection with gaming or any game which affects the result of a wager by determining win or loss.3 Because of the more direct impact on the outcome of a wager, gaming devices and gaming device manufacturers were both subject to mandatory licensing and approval.

This dichotomy functioned well for many years. Of late, however, it has become more difficult for regulators to distinguish between associated equipment and gaming devices. When the discretionary licensing regime in Nevada was established in 1983, the state-of-the-art in casino gaming devices was very different than it is today. At that time, electro-mechanical slots still dominated the slot floor. Even though video slots were introduced in the mid-to-late 1970s, they were not initially popular with players. It wasn’t until well after video poker was introduced in 1979 and grew in popularity and acceptance that electronic video-based games gained broad acceptance with patrons. In this environment, distinguishing gaming devices from associated equipment was relatively easy. In the intervening 32 years, however, technology changed the casino floor. Video slots, table game enhancements, the computerization of traditional games such as bingo, computerized player rewards systems, promotional gaming systems, cashless wagering and related systems began to blur the line between gaming devices and associated equipment.

In this technology-infused gaming environment, the control board introduced a bill, Senate Bill 38, to expand its powers to regulate and license associated equipment manufacturers. The most significant change brought by SB38 is that licensing or findings of suitability will move from a discretionary activity to a mandatory activity for associated equipment manufacturers. To ease the burden on manufacturers—particularly those whose products do not influence the outcome of a game, alter player account balances or player award balances—the new law requires the gaming commission to adopt regulations that distinguish associated equipment manufacturers by the proximity of the equipment’s influence on games, player accounts and tax calculations, and have different levels of licensing requirements for those whose equipment will have less direct impact on the outcome of wagers and payments. In testimony, the three-tier licensing regime that is currently used for interactive gaming service providers was cited as the likely model that will be adopted for associated equipment manufacturer registration and approval.

Another significant change made by SB38 was to shift the cost of the licensing investigation from the control board to applicants. Nevada has well-established law that mandatory licensing applicants are responsible for paying investigative fees, while the control board is required to incur the investigative costs for discretionary licensing. Prior to SB38, the statutory identification of associated equipment manufacturer licensing as discretionary meant the control board had to pay for any investigation of an associated equipment manufacturer called forward for licensing. Although SB38 on its face only requires an initial $1,000 registration fee, testimony revealed that because the registration and approval are now mandatory, applicants will be required to pay their own investigative fees.

This change may be significant because, as many current Nevada gaming licensees know, investigative fees are often substantially greater than license fees. This burden of investigatory fee shifting is mitigated somewhat by the envisioned tiered registration process. Testimony for SB38 revealed intent by the control board to craft regulations that will be responsive and proportional to the type of equipment in question. Namely, manufacturers of items such as currency weights, cards and dice will not have to face the same level of investigation as a manufacturer of a bingo system or other system that interfaces with and affects the outcome of a game.

In addition to associated equipment manufacturer registration and investigation, employees of an associated equipment manufacturer are now deemed to be gaming employees and subject to all regulations governing gaming employees.

Given the technology division of the control board’s interest in SB38, the regulation-drafting process and workshops that will determine and set out the details of how associated equipment registration and licensing will be handled should begin shortly (if they have not begun by the time this article is printed). Associated equipment manufacturers doing business in Nevada will want to follow and, as appropriate, participate in this process. Those operating solely in other jurisdictions are still advised to take note of how these changes are implemented because regulators in those other jurisdictions are likely doing so.

Nightclubs and Day Clubs
From the inception of Nevada’s modern two-agency gaming regulatory regime, the focus of regulation has been on those involved with gaming. Although Nevada regulators have the statutory authority to call anyone associated with a gaming licensee forward for licensing, such discretionary licensing is rare and involves a significant cost to the control board (which, as explained earlier, must pay the costs of investigation when the licensing is discretionary rather than mandatory). Senate Bill 38, in addition to associated equipment registration and investigation, provides that nightclubs and day clubs are now subject to regulation of the control board and gaming commission.

These provisions of SB38 are in direct response to illicit activities at third-party-operated nightclubs and day clubs, such as open drug distribution, prostitution, patron dumping and refusals to permit regulatory and law enforcement officials on premises without a warrant.4 Prior to SB38, Nevada’s gaming regulators only had jurisdiction over the casino licensee that leased space to the nightclub and day-club operators. This resulted in some fines of casino operators for permitting a tenant to engage in illicit conduct5, and many gaming companies changed their lease agreements with nightclub and day club tenants to address regulatory concerns. Illicit activities in nightclubs and day clubs continued, however. This was a concern for Nevada regulators because such illicit activities negatively impact the reputation of the gaming operators associated with such nightclubs and day clubs.

Senate Bill 38 is the first time that non-gaming companies are explicitly statutorily required to be registered and regulated by Nevada’s state gaming authorities. The change appears to be a welcome one, as SB38’s club regulation provisions had the support of much of the gaming industry as well as key operators of nightclubs and day clubs, such as Hakkasan.

Senate Bill 38’s provisions essentially treat club operators in a manner similar to gaming licensees. If required by the control board or gaming commission, the employees of such licensees shall be subject to a background investigation similar to those conducted for gaming employees, which, as Nevada licensees know, can be comprehensive, intrusive and expensive.

Because this legislation had broad industry and regulator support, we expect regulatory workshops to begin this year. It remains to be seen how the typically unregulated, or mildly regulated, club industry responds to the extensive requirements of Nevada’s gaming regulatory system. It is certain, however, that clubs operating within a gaming premises will have to comply with and embrace this new extension of Nevada’s regulatory reach.

Footnotes
1 See Nevada Revised Statutes Section 463.0136 (2015) (available online at https://www.leg.state.nv.us/NRS/NRS-463.html#NRS463Sec0136)
2 See Nevada Revised Statutes Section 463.665 (2014) (available online at https://www.leg.state.nv.us/NRS/NRS-463.html#NRS463Sec665)
3 See Nevada Revised Statutes Section 463.0155 (2015) (available online at https://www.leg.state.nv.us/NRS/NRS-463.html#NRS463Sec0155).
4 See e.g. Industry Letter dated April 9, 2009 (available at http://gaming.nv.gov/Modules/ShowDocument.aspx?documentid=5377). See also Industry letter dated March 21, 2013 (available at http://gaming.nv.gov/modules/showdocument.aspx?documentid=7696)
5 Ron Sylvester, Nevada Gaming Commission approves $1 million fine against Palms, Vegas Inc, January 24, 2013 (available online at http://vegasinc.com/business/gaming/2013/jan/24/nevada-gaming-commission…)

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