1. The board of directors of a risk retention group must have a majority of independent directors. If the risk retention group is a reciprocal risk retention group, the attorney-in-fact is required to adhere to the same standards regarding independence of operation and governance as imposed on the risk retention group’s board of directors or subscribers advisory committee under this section, and, to the extent permissible by state law, service providers of a reciprocal risk retention group must contract with the risk retention group and not the attorney-in-fact.

2. No director qualifies as independent unless the board of directors affirmatively determines that the director has no material relationship with the risk retention group. Each risk retention group shall disclose these determinations to its domestic regulator at least annually. For the purposes of this subsection, any person that is a direct or indirect owner of or subscriber in the risk retention group, or is an officer, director or employee of such an owner or insured, unless some other position of such officer, director or employee constitutes a material relationship, as contemplated by 15 U.S.C. § 3901(a)(4)(E)(ii), is considered to be independent.

3. The term of any material service provider contract with a risk retention group must not exceed 5 years. Any such contract, or its renewal, must require the approval of the majority of the risk retention group’s independent directors. The risk retention group’s board of directors shall have the right to terminate any service provider, audit or actuarial contracts at any time for cause after providing adequate notice as defined in the contract. The service provider contract is deemed material if the amount to be paid for such contract is greater than, or equal to, 5 percent of the risk retention group’s annual gross written premium or 2 percent of its surplus, whichever is greater. No service provider contract which creates a material relationship may be entered into unless the risk retention group has notified the Commissioner, in writing, of its intention to enter into such a transaction at least 30 days before and the Commissioner has not disapproved it within such period. For the purposes of this subsection:

(a) “Lawyer” does not include defense counsel retained by the risk retention group to defend claims, unless the amount of fees paid to such lawyer creates a material relationship.

(b) “Service provider” includes, without limitation, a captive manager, auditor, accountant, actuary, investment advisor, lawyer, managing general underwriter or other party responsible for underwriting, determination of rates, collection of premium, adjusting and settling claims or the preparation of financial statements.

4. The board of directors shall adopt a written policy in the plan of operation as approved by the board that requires the board to:

(a) Ensure that all owners and insureds of the risk retention group receive evidence of ownership interest;

(b) Develop a set of governance standards applicable to the risk retention group;

(c) Oversee the evaluation of the risk retention group’s management, including, without limitation, the performance of the captive manager, managing general underwriter or other party or parties responsible for underwriting, determination of rates, collection of premium, adjusting or settling claims or the preparation of financial statements;

(d) Review and approve the amount to be paid for all material service providers; and

(e) At least annually, review and approve:

(1) The risk retention group’s goals and objectives relevant to the compensation of officers and service providers;

(2) The officer’s and service provider’s performance in light of those goals and objectives; and

(3) The continued engagement of the officers and material service providers.

5. A risk retention group must have an audit committee composed of at least three independent board members. A board member that is not independent may participate in the activities of the audit committee if invited by the members, but cannot be a member of such committee.

6. An audit committee established pursuant to subsection 5 must have a written charter that defines the committee’s purpose, which must include, without limitation:

(a) Assisting the board of directors with oversight of:

(1) The integrity of financial statements;

(2) Compliance with legal and regulatory requirements; and

(3) The qualifications, independence and performance of the independent auditor and actuary;

(b) Discussing the annual audited financial statements and quarterly financial statements with management;

(c) Discussing the annual audited financial statements and, if advisable, its quarterly financial statements with its independent auditor;

(d) Discussing policies with respect to risk assessment and risk management;

(e) Meeting separately and periodically, either directly or through a designated representative of the committee, with management and independent auditors;

(f) Reviewing with the independent auditor any audit problems or difficulties and management’s response;

(g) Setting clear hiring policies of the risk retention group as to the hiring of employees or former employees of the independent auditor;

(h) Requiring the external auditor to rotate the lead, or coordinating, audit partner having primary responsibility for the risk retention group’s audit as well as the audit partner responsible for reviewing that audit so that one such person does not perform audit services for more than 5 consecutive fiscal years; and

(i) Reporting regularly to the board of directors.

7. The domestic regulator may waive the requirement to establish an audit committee composed of independent board members if the risk retention group is able to demonstrate to the domestic regulator that it is impracticable to do so and the board of directors itself is otherwise able to accomplish the purposes of the audit committee.

8. The board of directors shall adopt and disclose governance standards which must include:

(a) A process by which the directors are elected by the owners and insureds;

(b) Qualification standards;

(c) Responsibilities;

(d) Access to management and, as necessary and appropriate, independent advisors;

(e) Compensation;

(f) Orientation and continuing education;

(g) The policies and procedures to be followed for management succession; and

(h) The policies and procedures to be followed for annual performance evaluation of the board.

As used in this subsection, “disclose” means making information available through electronic or other means, including, without limitation, posting such information on the risk retention group’s Internet website and providing such information to its members and insureds upon request.

9. The board of directors shall adopt and disclose a code of business conduct and ethics for directors, officers and employees which must include, without limitation:

(a) Conflicts of interest;

(b) Matters covered under the corporate opportunities doctrine within the state of domicile;

(c) Confidentiality;

(d) Fair dealing;

(e) Protection and proper use of assets of the risk retention group;

(f) Compliance with all applicable laws, rules and regulations; and

(g) Requiring the reporting of any illegal or unethical behavior which affects the operation of the risk retention group.

The board shall promptly disclose any waivers of the code for directors or executive officers.

10. The captive manager, president or chief executive officer of a risk retention group shall promptly notify the domestic regulator, in writing, if he or she becomes aware of any material noncompliance with this section.

11. As used in this section:

(a) “Board of directors” or “board” means the governing body of a risk retention group elected by the shareholders or members to establish policy, elect or appoint officers and committees and make other governing decisions.

(b) “Director” means a natural person designated in the articles of the risk retention group, or designated, elected or appointed by any other manner, name or title to act on the board.

(c) “Material relationship,” of a person with a risk retention group, includes, without limitation:

(1) The receipt in any one 12-month period of compensation or payment of any other item of value by such person, a member of such person’s immediate family or any business with which such person is affiliated from the risk retention group or a consultant or service provider to the risk retention group that+ is greater than or equal to 5 percent of the risk retention group’s gross written premium for such 12-month period or 2 percent of its surplus, whichever is greater, as measured at the end of any fiscal quarter falling in such a 12-month period. Such person or immediate family member of such a person is not considered to be independent until 1 year after his or her compensation or payment from the risk retention group falls below the threshold set forth in this subparagraph.

(2) A director or an immediate family member of a director who is affiliated with or employed in a professional capacity by a present or former internal or external auditor of the risk retention group is not considered to be independent until 1 year after the end of the affiliation, employment or auditing relationship.

(3) A director or immediate family member of a director who is employed as an executive officer of another company where any of the risk retention group’s present executives serve on that company’s board of directors is not considered to be independent until 1 year after the end of such service or the employment relationship.

(Added to NRS by 2015, 3505)