30 January 2024

"An open floodgate" Are college compliance teams taking NIL risks seriously?

In the rush to give NCAA athletes NIL rights, did universities leave themselves exposed? The lack of preparedness for issues taxes, vetting payments, and preventing financial crimes for overnight student millionaires could cause major compliance headaches. MBK Search looks at the lay of the NIL land.

Experts have compared the introduction of name, image, and likeness (NIL) compensation rules for U.S. college athletes in 2021 to a “Wild West” of compliance.

NIL reforms allowing student-athletes to profit off their personal brands have left some colleges overwhelmed by their implications. MBK Search CEO Spencer Knibbe says that issues, from tax reporting to money laundering risks, have now come to the fore.

“Compliance departments and universities were caught flat-footed. Nobody thought about creating 18, 19, 20-year-old millionaires,” he says.

Knibbe says the lack of controls around outside endorsement deals with young, newly enriched athletes has created an environment ripe for compliance failures. It has also made financial crimes and potential scandals more likely.

“It’s only a matter of time until something goes wrong. It’s also fairly scary from my perspective as a risk professional when it comes to potential for things like gambling and organized crime.”

Examples of NIL Deals and Their Impact

In college football, players like Shedeur Sanders have received some of the highest NIL deals. His On3 NIL valuation is $5.1 million. Arch Manning, is valued at $2.9 million. Other prominent football players like Marvin Harrison Jr. and Bo Nix have also landed large deals, valued at $1.4 million and $1.3 million.

In men’s college basketball, players like Armando Bacot and Hunter Dickinson have inked deals with brands like Crocs, Dunkin’, and adidas’ NIL ambassador network. Shaqir O’Neal has also promoted brands like boohooMAN and Capital One, leveraging his social media following and name recognition.

“Compliance departments and universities were caught flat-footed. Nobody thought about creating 18, 19, 20-year-old millionaires.”

State and School Rules

Individual colleges and states have adopted various NIL regulations. They are navigating the new landscape created by the NCAA’s NIL policy changes. These regulations differ from one state to another, reflecting diverse approaches to managing NIL rights and student-athletes’ involvement in commercial activities.

States like Colorado, Delaware, Michigan, and New York have implemented NIL laws. Colorado’s law allows student-athletes to earn payment for using their NIL. But, it permits the NCAA to continue regulating their NIL rights to some extent. In contrast, Michigan’s NIL laws favor student-athletes, as they don’t limit NIL rights based on NCAA rules. New York’s law has a unique aspect. It mandates Division I colleges to offer a “student-athlete assistance program”. This program may include a financial distress fund for student-athletes.

Delaware’s law focuses on regulating agents who represent student-athletes. It requires them to provide specific data to the state and include warning language in contracts. This approach is more about managing the relationships between student-athletes and agents rather than addressing NIL rights.

State laws vary, highlighting the complex and fragmented NIL landscape across the United States. Given these differences, athletes, managers, and institutions must understand the specific regulations in their respective states. They should seek legal counsel when necessary to navigate potential NIL agreements .

The NCAA’s interim NIL policy, implemented in July 2021, also outlines some restrictions. Universities task compliance administrators with monitoring and enforcing these restrictions. This includes managing collectives – groups established by alums or supporters of a university to provide NIL opportunities for student-athletes. There are over 200 collectives nationwide, many of which distribute significant sums to student-athletes, primarily in football and basketball. Compliance offices ensure that these collectives adhere to NCAA guidelines and investigate and report any potential violations, playing a crucial role in the process.

Current NCAA Regulatory Environment for NIL

The NCAA’s NIL rules have been changing in response to ongoing lawsuits. It is also in response to the changing landscape of college athletics. The NCAA recently proposed new rules that signify a shift towards more involvement and regulation in NIL activities.

NCAA President Charlie Baker’s recent proposals focus on mitigating risks associated with NIL rights. They aim to adapt to the current demands of college athletics. These proposals are a response to class action lawsuits. The lawsuits challenge the NCAA’s regulation of college athletics. The proposed changes include:

1. Intellectual Property and Licensing Rights: Schools can enter NIL deals with student-athletes. This raises potential complexities, especially when athletes transfer between institutions. That might lead to issues like ambush marketing claims.

2. School Compliance with Title IX: The proposals suggest that male and female athletes should be compensated equally, aligning with Title IX requirements. This poses challenges in ensuring equal opportunities for all athletes, especially with the involvement of booster collectives.

3. National Database and Visibility: The NCAA is considering a national database for NIL deals, which would increase transparency, but has yet to address how this would integrate with media rights and revenue.

The NCAA is still considering these proposals. The NCAA invites feedback from Division I Committee Members.

Adopted Rules Effective August 1, 2024

The NCAA Division I Council has adopted new rules concerning NIL activities, which will take effect on August 1, 2024. These include:

1. Voluntary Registration for NIL Service Providers: This will collect information on agents, financial advisers, and consultants, available to student-athletes and schools for informed decision-making.

2. Disclosure Requirements for NIL Agreements: Student-athletes must disclose NIL agreements greater than $600 in value to their universities. This information will contribute to a national database accessible to student-athletes.

3. Standardized Contract and Comprehensive NIL Education: The NCAA plans to develop a template contract and educate student-athletes on contractual obligations and NIL-related policies.

Future Proposals

Further proposals are being considered for adoption in April 2024. These proposals focus on enhancing school support for NIL activities. They also aim to define NIL entities. This includes allowing schools to facilitate NIL deals between students and third-party entities. It also clarifies rules for communications between schools and NIL entities. The NCAA is also considering rules that would prevent NIL entities from engaging with prospective student-athletes until certain conditions are met.

These developments show a significant shift in the NCAA’s approach to NIL. The shift is towards a more structured and transparent system. It aims to balance the interests of student-athletes, schools, and third-party entities.

GRC Challenges Abound

Knibbe, a former college football player at Harvard, listed multiple compliance issues thrown up by NIL reforms. Most athletics programs struggle to work through them.

For now, college stars’ influencer-style promotions continue to grow. Few structured guardrails are in place. But Knibbe expects the current rulebook vacuum to catch up with universities. He also expects it to catch up with their marquee money-earning players.

He predicts regulators will step in after inevitable scandals occur. These scandals have reshaped financial markets. Experts say that if a company doesn’t have good compliance controls, bad actors can exploit it.

“When there’s no rules, bad actors come out. People get hurt. And then the regulators come in and change the rules,” Knibbe says.

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