Kentucky Emergency Regs Look A Lot Like Those In Vermont

The Kentucky Horse Racing Commission last week rolled out a set of emergency regulations designed to get legal wagering up and running by the start of the NFL season. The regulations, which outline a $50,000 application fee with $10,000 cost for renewal, leave operators latitude in certain areas while clamping down in others.

Kentucky will become the biggest legal wagering state to allow betting starting at age 18. Because of that, the emergency rules are a departure from the latest stringent advertising and marketing standards laid down by multiple states that have banned advertising to those under 21 or on college campuses.

The Kentucky emergency rules do specify that operators cannot advertise or market at “elementary, middle, or high school activities.” They also stay in line with the latest responsible gaming trend by prohibiting the use of “free” or “risk-free” as terminology in advertising.

The state will be on the cutting edge in terms of funding accounts, as one of a few that will allow accounts to be funded using crypto, digital, or virtual currency.

Regs have similarities to those in Vermont

The regulations, which were written with the help of consultant Gaming Laboratories International, have some similarities to those released recently in Vermont. Operators will likely have some of the same concerns as they have raised in that state, including objections about sharing source code with a testing laboratory and being asked to make “exact” rather than “flexible” matches during the authentication process.

The emergency rules are open for public comment until Aug. 31, and an in-person public hearing is set for Aug. 22.

Kentucky regulator ‘very confident’ in its approach to sports betting https://t.co/Pz1hiWSASL

— Alfonso Straffon 🇨🇷🇺🇸🇲🇽 (@astraffon) July 20, 2023

Kentucky’s legislature legalized wagering March 31, and the KHRC has plans to launch operators Sept. 7, the first day of the NFL season. The timeline from legal to live will be among the most aggressive of any state with legal betting, though Iowa still holds the mantle for quickest to market at three months and two days from passage of legislation.

Kentucky’s law allows for up to 27 digital sportsbooks, all tethered to the state’s nine horse racetracks. Each track is entitled to three skins plus one retail location. Among the racetracks are the famed Churchill Downs and Keeneland Race Course, which in 2022 hosted the Breeders’ Cup.

Because of the speed with which the KHRC is planning to get platforms up and running, it will begin with emergency rules that will expire in April 2024. Each has a corresponding “ordinary regulation,” and regulators will consider comments, massage the text, and revamp the emergency regulations before they become permanent.

Sharing of source code is among issues

Among the key issues that operators will likely push back on are three that were also included in the Vermont proposed rules, on which GLI also consulted: the requirement to share source code with GLI; “integration testing”; and a requirement in the “Age and Identity” section that requires exact matches.

Operators rarely are inclined to share source code, which is the foundation on which their platforms are built, and integration testing could result in extra work for operators asked to integrate their technology with that of suppliers and vendors. The ask in Vermont and Kentucky to share source code with GLI has not been common nationally.

With regard to how age and identity are authenticated, operators said in their Vermont comments that requiring an exact match is more stringent than the industry standard and can lead to friction for the customer, which in turn could send them back to illegal sportsbooks.

Kentucky Horse Racing officials making progress on sports betting ahead of fall https://t.co/vQhON7sssh

— WLKY (@WLKY) July 19, 2023

The Kentucky regulations set a lower bar for entry into the state than many others — operators seeking licenses need only be licensed in three other U.S. jurisdictions rather than the five required by multiple states or the 10 that a coalition of operators asked for in the unsuccessful Proposition 27 in California last year.

The regulations also will save operators some paperwork in the early going — “initial applications completed for sports wagering conducted in 2023 may also serve as the renewal application for sports wagering conducted in 2024.” The KHRC has set Nov. 1 as an annual deadline to submit applications, which would align sports betting with the state’s horse racing licensing process.

While the law and emergency regulations do not allow for wagering on dog or horse races via a sportsbook in Kentucky, horse racing is part of the fabric of the state and parimutuel wagering is legal under a different law. Several major sportsbook operators also have horse betting platforms, and it is unclear from the current regulations if those operators would be able to integrate their sports and horse betting platforms to make a more seamless experience for bettors.

Shared liquidity pools?

Of note in the emergency regulations is that the term “Shared Liquidity Pool” is defined, though it is unclear in the regulations what it might be applied to. Shared liquidity pools are critical to offering online poker, which is not included in the new law, but such liquidity is rarely used in sports betting. While there is an argument for such pools to be used for nationwide contests, there is the issue of restrictions in the federal Wire Act to contend with. Going forward, the inclusion of the phrase could allow sportsbooks to explore how to use shared liquidity pools or could mean that regulators are looking to a future expansion of gaming.

While the previous two examples leave some room for interpretation, there are other sections of the regulations that have a high level of specificity. For example, also in the definitions section, the term “sufficient clarity” is defined as “a surveillance system to record images at a minimum of of 20 frames per second or equivalent.” Such language is unusual, and in general, the idea would be that surveillance systems used in retail sportsbooks be clear enough to read, but that level of clarity would not be defined in regulations.

Thayer expressed full confidence in KHRC.

Chair McDaniel, emphasizing his desire to ensure success, asked if the 14 employees requested by KHRC for sports betting auditing is enough to monitor the volume.

Eads said they feel confident with 14 and the funding.

— KY Senate Majority (@KYSenateGOP) July 19, 2023

Some other items of interest:

• Operators are likely to ask for clarity in defining “an individual who has the capability to directly affect the outcome of a Sports Wager or a payout to a patron.” This text falls under the definition of “Critical Employees” and leaves open to interpretation just who could affect the outcome of a wager.
• In the “General Provisions” section, the KHRC lists events that are banned, including wagering on penalties, disciplinary proceedings, and youth sports events, all of which are in line with regulations in other states. It also bans betting on the “outcome of replay reviews,” which could use some additional clarity or specificity. As written, that prohibition could mean, for example, that if a touchdown is under review and found to stand up, then the call is an “outcome” of a replay review.
• Operators must request to have markets added to the bet menu a minimum of 10 days prior to the event, though the KHRC did not specify how quickly it would respond to such requests.
• Operators will initially be required to keep their own self-exclusion lists rather than having a clearinghouse with the regulator. While operators are practiced in keeping these lists, and all are required in every jurisdiction to have a sign-up page or location, consumers will have to self-exclude at each sportsbook.
• The proposed rules require that terms and conditions be part of an operator’s internal controls. This is uncommon in requiring operators to have their terms and conditions approved by the KHRC. In most states, the terms and conditions are separate documents and operators can update them without approval.
• To provide problem gambling assistance, operators will be permitted to use a toll-free number from a “commission-approved organization” in advertising, promotions, and on websites. This language is broader than in other states, which have been requiring local phone numbers rather than 1-800-GAMBLER, which can be easier for operators live in multiple states to manage.
• Regulators will require licensees to have their responsible gaming program independently reviewed every five years, which is a departure from the industry standard.