(Bloomberg) Daily fantasy-sports companies, at the center of legal and regulatory debate about whether their games are gambling, have agreed to the formation of a self-regulatory body led by former acting U.S. Secretary of Labor Seth Harris.
The organization, called the Fantasy Sports Control Agency, will be charged with creating a system to ensure ethics and integrity across the fantasy industry as a whole. The group was formed by the Fantasy Sports Trade Association, whose biggest daily companies—DraftKings Inc. and FanDuel Inc.—boast billion-dollar valuations.
The FSTA, which has represented the industry since 1988, said it would retain a major accounting firm that it didn’t name to monitor and audit the initiative.
“The reason that the FSTA established an independent authority and asked me to lead this organization is to ensure that it’s not a sham, that it’s not a fake, that it’s not just a publicity stunt,” Harris said in an interview. The new entity will have a staff that’s independent from the companies and the FSTA, he said. “It’s a freestanding ethics and integrity agency.”
The industry drew scrutiny from regulators and lawmakers this month after media reports that a DraftKings employee used inside information to win money as a player on FanDuel. DraftKings has said the employee did nothing wrong. Still, the companies have barred employees from participating in online fantasy-sports contests for money.
Meanwhile, attorneys general in two states, including New York, are investigating the daily fantasy industry, which Nevada has said is gambling and needs to be licensed. In response, the FSTA pulled its winter conference, scheduled for January, from the state.
The FSTA said in a letter to its members, a copy of which was obtained by Bloomberg News, that the industry was at a “pivotal moment,” and that it’s better for the regulation to come from within. The FSTA has more than 300 members, 75 percent of which aren’t daily fantasy companies.
“We can establish and enforce these systems ourselves, or we can put our industry in the hands of outside entities who do not understand the industry as we do—outside entities who are not as able nor as committed to establishing rules and regulations that ensure integrity and transparency while allowing the industry to continue to thrive,” the letter read. “Simply put, the leadership of the FSTA believes that we cannot and should not allow the future of our industry to rest in the hands of others.”
Harris and representatives of the FSTA board have held initial meetings with professional sports leagues, media companies and other industry stakeholders about the self-regulation plan. Harris said the new entity wouldn’t be a large bureaucracy, and it isn’t yet clear what its staff or budget will be.
“It’ll be very lean and mean in the beginning,” he said.
Marc Edelman, a law professor at Baruch College in New York, said it’s worth noting that Harris is a lawyer at Dentons, which serves as outside counsel to the FSTA.
“It’s a play out of Major League Baseball in 1921: Create a ‘commissioner’ position to give the appearance of self- regulation as a way to hopefully avoid government oversight,” said Edelman, who consults on legal issues for online fantasy sports companies.
Mark Conrad, a professor of law and ethics at Fordham University in New York, said the industry’s “reactive strategy” probably won’t be enough to placate lawmakers.
“It is too early to say what kinds of internal rules this body will come up with, but if they are not industrywide and not subject to sanction, I don’t think they will quell the criticism,” he said.
The new body will focus on creating a system consisting of four principal parts: standards; company controls, processes and leadership; auditing policies and procedures; and enforcement, which will include public recognition for compliance and undisclosed penalties for failure to comply.
Prevention, Not Punishment
“The goal is prevention, rather than punishment,” said Harris, adding that he’s never played daily-fantasy games, which let participants assemble rosters of real-life players with prizes awarded on how well that combination performs on the field. “If we have large numbers of violations and penalties, then we haven’t set the system up right. The goal is instead to prevent and preempt violations that will put players’ money at risk, put the integrity of the games at risk, and also put the reputation of the industry at risk."
The daily fantasy industry is projected to see $3.7 billion in entry fees in 2015, according to a September study by Eilers Research LLC. That number is expected to reach $17.7 billion in 2020, Eilers said.
Game of Skill
Fantasy sports are legal in the U.S. because they are considered a game of skill. The industry was given its exemption within the Unlawful Internet Gambling Enforcement Act of 2006, which was passed long before the creation of daily fantasy games, which feature entry fees and cash prizes in the millions.
The exemption has allowed FanDuel and DraftKings, founded in 2009 and 2011 respectively, to grow to billion-dollar valuations without the regulation required of Nevada casinos and sports books. Calls for more legal safeguards increased when the two companies launched competing advertising blitzes to coincide with the start of the 2015 National Football League season.
New York Attorney General Eric Schneiderman is among the public officials who have taken aim at the unregulated industry. Schneiderman announced in October that he was looking into the insider-trading allegations. Massachusetts Attorney General Maura Healey said in September that she was examining the daily-fantasy space, and the New York Times recently reported that the FBI is reaching out to players to inquire about Boston-based DraftKings.
Both DraftKings and FanDuel have raised more than $350 million in financing, primarily through venture capital firms, media companies and major sports leagues. Major League Baseball, the National Hockey League and Major League Soccer are DraftKings investors, as are New England Patriots owner Robert Kraft and Dallas Cowboys owner Jerry Jones. FanDuel’s investors include KKR & Co. and Comcast Corp., and the National Basketball Association has an equity stake as part of its partnership.
“We are committed to working with the Fantasy Sports Control Agency, the FSTA and all relevant government authorities to ensure that our industry operates in a manner that is completely transparent and fair for all consumers,” DraftKings said in a statement.
—With assistance from Eben Novy-Williams in New York.
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