TRIBAL EXECUTIVE COMMITTEE

P.O. BOX 305 . LAPWAI, IDAHO 83540 . (208) 843-2253

May 30,2017

Jonodev Chaudhuri, Chairman

National Indian Gaming Commission

1849 C StreetN.W.

Mail Stop #1621

V/ashington, D.C. 20240

Re: 25 C.F.R. Part 547 - Grandfathered Class II Gaming Systems

Dear Chairman Chaudhuri :

The Nez Perce Tribe (Tribe) offers the following comments on the "grandfathering" provision in

the National Indian Gaming Commission's (NIGC) Class II Technical Standards, 25 C.F.R. Part

547. In particular, the Tribe wishes to comment on the "sunset clause" within the grandfathering

provision, which provides that certain Class II gaming systems manufactured before November

10, 2008, must either be brought into compliance with the requirements of 25 C.FR. Part 547 or

removed from play.

As an initial matter, we would like to express our appreciation and support for the NIGC's efforts

to reach out and consult with tribal govemments on this issue, which has long been a source of

concern for both tribal governments and the NIGC alike. As acknowledged by the NIGC, the issue

of grandfathered Class II gaming systems, "more than any other topic, has been the subject of long

deliberation and analysis within the Commission."i Tribal governments have similarly invested

significant time and effort to better understand the impact of the sunset clause on tribal gaming

operations.

In fact, earlier this year, a Class II Gaming Sub-Committee (Class II Sub-Committee) consisting

of tribal regulators and other Class II gaming experts was commissioned by the National Indian

Gaming Association to collect data concerning the technical performance of grandfathered Class

II gaming systems. With the assistance ofthe research firm KlasRobinson, a survey was conducted

across Indian Country to determine the quantitative impact of the sunset clause and the level of

risk, if any, posed by grandfathered systems on the integrity and security of Class II gaming.

The survey included the participation of 32 tribal governments representing 117 tribal casinos in

12 different states. Of the participants, 18 tribes operating approximately 16,040 grandfathered
Class II gaming systems in 93 casinos across 7 states, provided input on the integrity, safety, and

security oftheir grandfathered games. Approximately 15,750 ofthe 16040 grandfathered gaming

systems surveyed were operated by Oklahoma tribes.

As discussed below, the survey found no evidence whatsoever to indicate or even suggest that

grandfathered Class II gaming systems are aîy less secure or more susceptible to a breach than

their fully compliant counterparts. The Tribe believes the survey results uttd findings provide the

evidentiary basis needed to show that the sunset clause is neither appropriate nor justified and

should be withdrawn fuom25 C.F.R. Part 547. We hope that the NIGC will take the survey results

and our comments below into due consideration and work to resolve this long-standing issue in a

manner that will ensure the preservation and continued growth of the Class II gaming industry.

1. GRANDFATHERED CLASS II GAMING SYSTEMS DO NOT POSE ANY RISK

TO GAMING OPERATIONS OR PATRONS AND ARE NO LESS SECURE THAN

FULLY COMPLIANT CLASS II GAMING SYSTEMS.

It has been nearly a decade since the grandfathering provision was first introduced by the NIGC

for the pulpose of "avoid[ing] any potentially significant economic and practical consLquences of

requiring immediate compliance"ii with the then-new Technical Standards. During the rulemaking

preceding the 2008 final rule of 25 C.F.R. Part 547, one commenter suggested exempting ali

existing Class II gaming technology from the Technical Standards, to which the NIGC replieã:

Perpetually grandfathering existing hardware will create a permanent class of

non-compliant equipment. That is not consistent with the regulatory pu{pose

of the technical standards, namely to ensure the integrity and security of Class

II gaming systems and the accountability of Class II gaming revenue.iii

No further analysis or discussion was or has since been provided to support the NIGC's conclusion

that a permanent exemption of grandfathered games would somehow be inconsistent with the

regulatory purpose of 25 C.F.R.Part 547. But an extreme measure such as the wholesale removal

of a gaming product from the marketplace demands a compelling justification based on adequate

facts and information. With less than two years remaining until the sunset deadline, the neËd to

establish a rational connection between the regulatory putpore of the sunset clause and

grandfathered gaming systems is more pressing now than ever before.

The first step in establishing this connection is to determine the regulatory benefits, if any, in

þl"gi$ all gaming systems into full compliance with 25 C.F.R Part 547.- Or, put converiely,

identifuing the regulatory detriments that would result from the continueá operation óf

grandfathered games past the sunset deadline. Before the sunset clause takes effect, it should be

undeniably clear that the mandatory retirement of grandfathered gaming systems will make Class II gaming safer and more secure. The non-compliairt status of grandfathered systems, standing

alone, is not a sufficient basis upon which to mandate a recall of lawful gaming equipment.

Moreover, if the regulatory objective of 25 C.F.R. Part 547 is to ensure the integrity and security

of Class II gaming systems, there must be some evidence to support the NIG-C's position thát

maintaining grandfathered games past the sunset deadline will somehow impede achievement of

this objective. Since even the most highly regulated gaming activity is subjeìt to some degree of

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risk, the evidence must show that grandfathered gaming systems are subject to increased risks

relative to their fully compliant counterparts.

The survey commissioned by the Class II Sub-Committee was focused on gathering information

on the above issues, relying on the experiences and knowledge acquired by Class II gaming tribes.

Of the 93 casinos with grandfathered systems that were surveyed, not one reported any breaches

of safety, security, or integrity during operation, or believed that grandfathered systems were

susceptible to cheating or manipulation by patrons. Survey participants did, however, report a

few, albeit very minimal, compliance issues with fully compliant systems. Though few in number,

they nonetheless exceed the number of compliance issues reported with respect to grandfathered

systems. Based on their experiences, all 93 casinos unanimously agreed that there are no technical

oÍ eommercial reasons why grandfathered systems could not be offered after the sunset deadline

ofNovember 10,2018.

In the nearly ten years since the promulgation of the grandfathering provision, we have not been

made aware of any documented instances where a grandfathered system posed a greater risk to

patrons or the tribal gaming operation than a fully compliant gaming system. As confirmed by the

survey results, there is simply no basis for concluding that the removal of grandfathered Class II

gaming systems will make Class II gaming any safer or more secure. The mere faot that a system

is fully compliant with 25 C.F.R. Part 547 does not seem to bear any regulatory benefits with

respect to the safety, security, or integrity of Class II gaming. Therefore, full compliance with the

Technical Standards, while important, is not a necessary condition to achieving the NIGC's stated

regulatory obj ectives.

Moreover, experience has shown that. grandfathered gaming systems are no less technically

advanced or secure than fully compliant systems. In fact, some game manufacturers provide

grandfathered systems that are more advanced and secure than what is required by 25 C.F.R. Part

547 and tribal regulators. It should also be noted that tribal regulatory gaming authorities have

been exercising their authority as the primary regulators of Class II gaming to evaluate and approve

modifications thát have improved the overall performance and complianco of grandfathered Class

II gaming systems.

In the absence of any identified risks or threats, a rational connection cannot be drawn between

the sunset.clause and the regulatory purpose of 25 C.F.R. Part 547 . There are no facts or evidence

to support a hard sunset deadline, nor does the historical record of Class II gaming support the

NIGC's proposition that the operation of grandfathered games will compromise the safety,

security, or integrity of Class II gaming.

Given that grandfathered systems have been operating for over a decade without any safety or

integrity issues, a blanket recall of such products from the market would constitute an arbitrary

and capricious act. We can think of no administrative agenoy, including those with specific

statutory authority to promulgate product standards, that would require a general recall of products

in the marketplace without a showing of a defect or flaw that poses an imminent threat to human

life or safety. The survey findings did not reveal any defects, flaws, or threats - technical or

otherwise -in relation to grandfathered systems that would warrant a product recall.

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However, even assuming, arguendo, that grandfathered gaming systems did somehow pose a

higher risk to patrons or the gaming operation than fully complaint systems, such risks would be

continuously mitigated and avoided through the monitoring and enforcement functions of tribal

gaming regulatory authorities. The day-to-day, frontline regulation of tribal gaming is performed

by tribal gaming regulatory authorities, who possess both the knowledge and technical expertise

to immediately identify, assess, and mitigate any potential or actual threats and risks to the gaming

operation. As the primary regulators of Class II gaming, tribal gaming regulatory authorities

should be fully accorded that role in the NIGC's regulations, especially those governing Class II

gaming activities such aS 25 C.F.R. Part 547.

2. IMPLEMENTATION OF THE SUNSET CLAUSE WILL CAUSE SIGNIFICANT

ECONOMIC HARM TO THE CLASS II GAMING INDUSTRY AND THE TRIBAL

GOVERNMENTS WHO RELY ON CLASS II GAMING REVENUE AS AN

IMPORTANT ECONOMIC BASE.

In the consultation briefing materials provided to us earlier this year, the NIGC included a

background discussion of the grandfathering provision, which noted the "particular concern" at

the time the regulation was promulgated of "the potential financial burden on bringing gaming

systems that had already been manufactured and/or put into play . . . into complianco with the new

2008 rule."iu As explained by the NIGC, the-grandfathering provision was enacted to "reduce that

cost"n to tribal governments.

If the intent of the grandfathering provision is to mitigate the costs of compliance to tribal

governments, it is unclear why it still includes a sunset requirement that is certain to cause

significant economic harm without gerterating any appreciable regulatory benefits. The financial

hardship on tribes should not be any less of a concern today than it was when the grarrdfathering

provision was first enacted in 2008.

The negative economic impact of the sunset clause will be immense and jeopardizethe economic

viability of the Class II gaming industry, which is of vital importance to tribal governments not

just financially, but also as an aspect of tribal sovereignty and economic development.

Grandfathered Class II gaming systems represent a large percentage of the total Class II gaming

systems in play nationally. To provide a sense of scale, in Oklahoma alone, there are

approximately 24,000 grandfathered Class II gaming systems, which constitute roughly 4l%o af alI

Class II gaming systems in operation nationwide. Implementation of the sunset clause would wipe

out nearly half of the Class II gaming systems across Indian Country.

When calculating the compliahce costs associated with the sunset clause, it is important to bear in

mind that the economic costs to tribal governments will go beyond the direct costs of replacing

grandfathered equipment. First, there is the loss of the tens of millions of dollars that have been

invested by tribal governments in purchasing and maintaining grandfathered gaming equipment

and technology. There are also the costs associated with the downtime required to upgrade or

replace grandfathered systems, which could take up to 30 days or longer. The loss of play and

visitation by patrons who prefer the retired grandfathered games would also cause serious

economic harm to those tribal govemments who rely on grandfathered games as a major source of

tribal revenue.

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We note that at the time the grandfathering provision was enacted, the NIGC's belief was "that

natural market forces" would phase out existing Class II gaming technology, and that the "looming

sunset of the grandfather period would otherwise incentivize the industry's transition to fully

compliant systems."n' It appears the NIGC predicted that these events would help mitigate the

costs associated with replacing grandfathering equipment. However, this has not proven to be the

case; in fact, the opposite result has occurred, as confirmed by the survey results.

Survey participants with grandfathered games unanimously reported that their grandfathered Class

II gaming systems are still prohtable for their casinos, and that none'of their patrons are demanding

that they be replaced with more modern machines. One participant commented that "some of the

grandfathered games have the highest following among any of the offered games." For one tribe,

the "Class 2 grandfathered games earn the most revenue per day per device." As expected, the

survey confirmed that grandfathered gaming systems not only have a loyal customer base, but are

in some instances preferred over newer games that lack the familiar look and feel that patrons

expect.

Thus, none of the predicted cost-mitigating events appear to have occurred. Contrary to the

NIGC's predictions, market forces have actually supported rather than stymied the continued

operation and economic viability of grandfathered Class II gaming systems. Given their popularity

and profitability, there is no real incentive - financial or otherwise - for tribal gaming operations

to even begin considering the replacement of grandfathered gaming systems for fully compliant

ones. The financial burden that was of "particular concern" in 2008 has not lessened, but rather

increased exponentially and should be at the forefront of the NIGC's deliberations.

3. CONCLUSION

In closing, the Tribe thanks the NIGC for the opportunity to share our views and concems

regarding the grandfathering provision in 25 C.F,R. Part 547. We again urge the NIGC to

reconsider its approach to the sunset clause, which will have serious consequences on the economic

well-being of tribes and their interdependent industries. The goal should be to reduce or avoid

unnecessary compliance costs, without sacrificing the benefits of regulation. Vy'here, as here, there

are no demonstrable benefits of regulation associated with the sunset clause, there is simply no

basis orjustification for mandating the retirement of lawful, profitable, and secure gaming systems.

A,^

Chairman

'Minimum Technical Standards for Class II Gaming Systems and Equipment,TT Fed. Reg. 58475 (Sept. 21, 2012).

" Technical Standards for Electronic, Computer, or Other Technologic Aides Used in the Play of Class II Games, 73

Fed. Reg. 60,508, 60,521(Oct. 10, 2008) (to be codified at 25 C.F.R. pt. 547).

'" Id. at 60,521.

'u NIGC Consultation Briefing 2017, pg.7, available at

, Id.

^ Id.

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