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Franchot attempts to regulate fantasy sports amid legal questions

Comptroller Peter Franchot. (File)

Comptroller Peter Franchot. (File)

Commercial fantasy sports gaming will be regulated in Maryland under a set of new rules proposed by Comptroller Peter Franchot even as legislators and other officials debate whether the popular industry is even legal in the state.

The four-page proposal comes at a time when there is a great divide between the House of Delegates and the state Senate over the legality of commercial daily fantasy sports. The conflict over the murky legality of the industry was raised in a cover letter written by the counsel assigned to the state comptroller that described the industry as “more likely than not illegal under Maryland law.”

Still, Franchot said he has not only the legal authority but the responsibility to regulate the industry to protect consumers and ensure that the state is collecting taxes owed on winnings.

“Whatever you might think about daily fantasy sports, that horse has left the barn,” Franchot said. “It is here is here and there are 200,000 Marylanders registered and participating in it.”

Franchot said the legislature failed to act on the issue earlier this year. “That is why I feel it is incumbent upon us to step into the breach and move forward. Obviously, if the General Assembly takes further action we are obviously going to pay close attention to that.”

Franchot said he reviewed and drew from regulations from around the country including those in Massachusetts, Tennessee and Virginia. He called Maryland’s proposed rules “some of the strongest, pro-consumer regulations in the country.

‘More likely than not illegal’

But the comptroller’s counsel, in reviewing the proposed regulations, once again raised questions about the legality of daily fantasy sports gaming in the state.

Under the proposed regulations, fantasy competitions are defined under the 2012 law that was passed by the legislature that authorized what Franchot has called “beer and Fritos” leagues formed by groups of friends and other social groups that take place over the course of an entire season.

Brian L. Oliner, in a July 11 memo to Assistant Comptroller John Gontrum, acknowledged the agency’s legal authority to regulate fantasy gaming but said the 2012 law “likely cannot be read to authorize daily fantasy sports because it was never referred to a statewide referendum.”

Oliner makes it clear that the regulations do not apply to the season-long leagues but that they also could not be interpreted to authorize commercial operations such as DraftKings or FanDuel, the two largest operations.

“Consequently, although the matter is not free from doubt, daily fantasy sports are more likely than not illegal under Maryland law,” Oliner writes in the memo obtained by The Daily Record. “Traditional season-long fantasy sports are legal, however, as might other forms of fantasy sports that do not constitute commercial gaming.”

Franchot told reporters Thursday he “worked closely with Attorney General Brian Frosh to ensure that everything we did was appropriate.”

‘200,000 Marylanders disagree’

Franchot, who in October, called daily fantasy gaming “one half step away from the total corruption of sports.” Since then, he has stepped back from discussing his personal views on the industry and whether he sees it as commercial gaming or even if it is legal under state law.

The regulations announced Thursday morning ban anyone under the age of 18 from playing and bar professional athletes from playing in leagues related to the sport in which they play. Employees, operators and contractors of fantasy gaming businesses such as DraftKings and FanDuel would similarly be banned from playing.

A sign touts recommended fantasy sports regulations. (The Daily Record / Bryan P. Sears)

A sign touts recommended fantasy sports regulations. (The Daily Record / Bryan P. Sears)

Additionally the rules include:

  • A ban on leagues based on college and amateur sports.
  • A requirement that highly experienced players to be identified.
  • A prohibition of third-party anti-competitive software that could give some players an advantage over others.
  • Limits on monthly deposits of $1,000 per month unless the player certifies to the operator they have the assets to deposit additional funds.
  • A ban on the offering of credit to players.
  • A requirement that operators establish a reserve fund for paying out winnings.

The proposed regulations would only apply to commercial daily fantasy gaming and not traditional season-long leagues — so called beer and Fritos leagues — that are operated by companies such as Yahoo and ESPN.

The rules go to the General Assembly’s  Joint Committee on Administrative, Executive and Legislative Review, which can delay implementation but not derail it. Under a worse -case scenario, the proposed regulations would take effect in late October.

In a statement, FanDuel said it was still reviewing the four-page document but praised the effort, calling the regulations “a thoughtful approach with proposed regulations modeled after some of the best and strongest fantasy regulations installed in states across the country.”

“Maryland has long been a leader on the topic, passing a fantasy sports law in 2012, and the Comptroller’s regulations would keep Maryland at the forefront of smart policy making – striking a balance between ensuring fans can continue to play, embracing a growing industry that can be an economic engine and installing firm regulations for fantasy sports companies to protect consumers,” the company said in its statement.

Legislative divide

The Office of the Comptroller has had the authority to regulate fantasy gaming since the law was passed in 2012 but had not done so until this week.

An advisory letter to the General Assembly from the Office of the Attorney General earlier this year highlighted the issue of daily fantasy sports gaming, calling sites such as FanDuel and DraftKings commercial gambling under Maryland law. The letter said the activity had not been authorized by voters as required by the Maryland Constitution. The letter called on the legislature to clarify the issue during the 2016 session — an effort that fell apart during the 90-day session.

With the status quo maintained, daily fantasy sports sites continue to operate in the state without the threat of legal interference from the attorney general and no players in Maryland have been arrested for participating in illegal gaming. Franchot said the situation requires state government to ensure the games are fair, consumers are protected and that taxes are collected.

The legislature’s Joint Committee on Gaming Oversight was expected to take up the issue over the summer but so far has yet to schedule a meeting.

Del. Eric Luedtke, D-Montgomery County and co-chair of the committee, attributed the delay to the inability to schedule around summer vacations.

Luedtke, who favors regulating the daily fantasy industry, said Franchot’s proposed regulations are on track with what the House of Delegates would like to see happen.

“I think that until and unless someone takes the issue to court and seeks an injunction, the comptroller and I operate under the opinion that it’s legal until the court weighs in,” Luedtke said. “That could absolutely change things.”

Luedtke said he believes the committee could meet as soon as September though no meeting has yet been scheduled.

But Sen. Nancy King, D-Montgomery County and a co-chair of the committee, said the Senate believes that daily fantasy sports gaming is gambling and not legal under current law without the authorization of voters. She said no meetings of the joint committee have been scheduled because there is no consensus between the two legislative chambers on how to deal with the issue.

“In my mind, it’s all gambling,” King said. “I don’t care how you shake it. It won’t be legal until it goes to referendum.”

Legislation sponsored by Senate President Thomas V. Mike Miller Jr. would have codified the attorney general’s 22-page letter and made commercial sites illegal in Maryland without enabling legislation and voter approval.

King said the legislature will likely attempt to take up the issue again in the session that begins in January. She questioned Franchot’s effort to regulate the industry.

“It’s still not legal and it needs to go to referendum,” King said. “I don’t think that we can enforce much of anything.”