C. A risk retention group that is licensed in this state shall comply with all of the following:

1. 1. The board of directors of the risk retention group shall have a majority of independent board directors. If the risk retention group is a reciprocal risk retention group, the attorney-in-fact shall be 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, or both, under these standards, and, to the extent permissible under this state's laws, service providers of a reciprocal risk retention group shall contract with the risk retention group and not the attorney-in-fact.
2. 2. A board director does not qualify as independent unless the board of directors affirmatively determines that the board 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. Any person that is a direct or indirect owner of or subscriber in the risk retention group or is an officer, board director or employee, or all three, of an owner and insured, as contemplated by 15 United States Code section 3901(a)(4)(E)(ii), is considered to be independent, unless some other position of that officer, board director or employee constitutes a material relationship.
3. 3. The term of any material service provider contract with the risk retention group may not exceed five years. Any contract or its renewal shall require the approval of the majority of the risk retention group's independent board 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 that contract is greater than or equal to five percent of the risk retention group's annual gross written premium or two percent of its surplus, whichever is greater. A service provider contract that is a material relationship may not be entered into unless the risk retention group has notified the director of the department of insurance and financial institutions in writing of its intention to enter into the transaction at least thirty days before and the director of the department of insurance and financial institutions has not disapproved the transaction within that period.

4. 4. The board of directors of a risk retention group shall adopt a written policy in the plan of operation as approved by the board that requires the board of directors to do all of the following:

   1. (a) Ensure that all owners or insureds, or both, of the risk retention group receive evidence of ownership interest.
   2. (b) Develop a set of governance standards applicable to the risk retention group.
   3. (c) Oversee the evaluation of the risk retention group's management, including the performance of the captive manager, managing general underwriter or other parties responsible for underwriting, determination of rates, collection of premium, adjusting or settling claims or the preparation of financial statements.
   4. (d) Review and approve the amount to be paid for all material service providers.

   5. (e) Review and approve, at least annually, all of the following:

      1. (i) The risk retention group's goals and objectives relevant to the compensation of officers and service providers.
      2. (ii) The officers' and service providers' performance in light of those goals and objectives.
      3. (iii) The continued engagement of the officers and material service providers.

5. 5. Each risk retention group shall have an audit committee composed of at least three independent board members. A nonindependent board member may participate in the activities of the audit committee, if invited by the members, but cannot be a member of that committee. The audit committee shall have a written charter that defines the committee's purpose, which, at a minimum, shall be to do all of the following:

   1. (a) Assist in board oversight of the integrity of the financial statements, the compliance with legal and regulatory requirements and the qualifications, independence and performance of the independent auditor and actuary.
   2. (b) Discuss the annual audited financial statements and quarterly financial statements with management.
   3. (c) Discuss the annual audited financial statements with its independent auditor and, if advisable, discuss its quarterly financial statements with its independent auditor.
   4. (d) Discuss policies with respect to risk assessment and risk management.
   5. (e) Meet separately and periodically, either directly or through a designated representative of the committee, with management and independent auditors.
   6. (f) Review with the independent auditor any audit problems or difficulties and management's response.
   7. (g) Set clear hiring policies of the risk retention group as to the hiring of employees or former employees of the independent auditor.
   8. (h) Require 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 neither individual performs audit services for more than five consecutive fiscal years.
   9. (i) Report regularly to the board of directors.
6. 6. The director of the department of insurance and financial institutions may waive the requirement to establish an audit committee pursuant to paragraph 5 of this subsection if the risk retention group demonstrates to the director that doing so is impracticable and the risk retention group's board of directors is otherwise able to fulfill the requirements of the audit committee as set forth in this section.

7. 7. The board of directors shall adopt and disclose governance standards by making the information available through electronic means, such as posting the information on the risk retention group's website, or other means, and providing that information to members and insureds on request. The information shall include all of the following:

   1. (a) A process by which the board directors are elected by the owners or insureds, or both.
   2. (b) Board director qualification standards.
   3. (c) Board director responsibilities.
   4. (d) Board director access to management and, as necessary and appropriate, independent advisers.
   5. (e) Board director compensation.
   6. (f) Board director orientation and continuing education.
   7. (g) The policies and procedures that are followed for management succession.
   8. (h) The policies and procedures that are followed for the annual performance evaluation of the board.

8. 8. The board of directors shall adopt and disclose a code of business conduct and ethics for board directors, officers and employees and promptly disclose to the board of directors any waivers of the code for board directors or executive officers, including all of the following topics:

   1. (a) Conflicts of interest.
   2. (b) Matters covered under the corporate opportunity doctrine under the state of domicile.
   3. (c) Confidentiality.
   4. (d) Fair dealing.
   5. (e) Protection and proper use of risk retention group assets.
   6. (f) Compliance with all applicable laws, rules and regulations.
   7. (g) Requiring the reporting of any illegal or unethical behavior that affects the operation of the risk retention group.
9. 9. The captive manager, president or chief executive officer of the risk retention group shall promptly notify the domestic regulator, in writing, if either becomes aware of any material noncompliance with any of the risk retention group's governance standards.

D. For the purposes of this section:

1. 1. "Board 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 as a board director.
2. 2. "Board of directors" or "board" means the governing body of the risk retention group elected by the shareholders or members to establish policy, elect or appoint officers and committees and make other governing decisions.

3. 3. "Material relationship" means a person's relationship with the risk retention group, including any of the following:

   1. (a) The receipt in any one twelve-month period of compensation or payment of any other item of value by that person, a member of that person's immediate family or any business with which that 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 five percent of the risk retention group's gross written premium for that twelve-month period or two percent of its surplus, whichever is greater, as measured at the end of any fiscal quarter falling in a twelve-month period. The person or immediate family member of that person is not independent until one year after the person's compensation from the risk retention group falls below the threshold.
   2. (b) A relationship with an auditor in which a board director or an immediate family member of a board 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 independent until one year after the end of the affiliation, employment or auditing relationship.
   3. (c) A relationship with a related entity in which a board director or immediate family member of a board director who is employed as an executive officer of another company where any of the risk retention group's present executives serve on that other company's board of directors is not independent until one year after the end of that service or the employment relationship.
4. 4. "Service providers" includes captive managers, auditors, accountants, actuaries, investment advisers, attorneys and managing general underwriters or any other party responsible for underwriting, determination of rates, collection of premium, adjusting and settling claims or the preparation of financial statements. For the purposes of this paragraph, attorney does not include defense counsel retained by the risk retention group to defend claims, unless the amount of fees paid to those attorneys creates a material relationship.