< Back to H.R. 4802 (111th Congress, 2009–2010)

Text of the Risk Retention Modernization Act of 2010

This bill was introduced on March 10, 2010, in a previous session of Congress, but was not enacted. The text of the bill below is as of Mar 10, 2010 (Introduced).

Source: GPO

I

111th CONGRESS

2d Session

H. R. 4802

IN THE HOUSE OF REPRESENTATIVES

March 10, 2010

(for himself, Mr. Campbell, and Ms. Kosmas) introduced the following bill; which was referred to the Committee on Financial Services

A BILL

To modernize the Liability Risk Retention Act of 1986 and expand coverage to include commercial property insurance, and for other purposes.

1.

Short title

This Act may be cited as the Risk Retention Modernization Act of 2010.

2.

Oversight of compliance with preemption of State law under the Liability Risk Retention Act of 1986

The Liability Risk Retention Act of 1986 (15 U.S.C. 3901 et seq.) is amended by adding at the end the following new section:

8.

Oversight of compliance with preemption of State law

(a)

Survey

The Secretary of the Treasury shall survey and evaluate the extent to which States are in compliance with the prohibition under this Act of State regulation of risk retention groups and purchasing groups that are not domiciliaries of such State and periodically submit to the President and Congress reports on such compliance.

(b)

Disputes

In any dispute in which an issue arises of whether this Act preempts the regulation of a risk retention group or purchasing group by a State, any party to the dispute may make a written submission to the Secretary of the Treasury to request a determination as to whether the regulation at issue is preempted by this Act.

(c)

Standard

The Secretary of Treasury may only issue a determination under paragraph (b) that the regulation at issue is preempted by this Act if the regulation imposes a requirement upon the risk retention group that is inconsistent with the provisions of this Act.

(d)

Regulations, policies, and procedures

Not later than 90 days after the effective date in section 11 of the Risk Retention Modernization Act of 2010, the Secretary of the Treasury shall publish in the Federal Register final regulations, policy statements, guidelines, or procedures to implement this section.

(e)

Applicability of Administrative Procedures Act

Determinations issued pursuant to subsection (b) shall be subject to the applicable provisions of subchapter II of chapter 5 of title 5, United States Code (relating to administrative procedure).

(f)

Judicial review

Any party to the dispute may seek review of a final order of the Secretary of the Treasury under subsection (b) in the United States Court of Appeals for the District of Columbia Circuit.

.

3.

Corporate governance standards

The Liability Risk Retention Act of 1986 (15 U.S.C. 3901 et seq.), as amended by section 2 of this Act, is further amended by adding at the end the following new section:

9.

Corporate governance standards

(a)

Governance standards

The Secretary of the Treasury shall, not later 30 days after the effective date in section 11 of the Risk Retention Modernization Act of 2010, issue corporate governance standards for risk retention groups, which shall include requirements that—

(1)

the governing body of a risk retention group shall at all times include a majority of independent directors;

(2)

any material relationship between a director of a risk retention group and a service provider shall—

(A)

be documented by a written contract that—

(i)

is for a term of not more than 5 years; and

(ii)

may be terminated at any time for cause after providing reasonable notice as set forth in the contract;

(B)

be approved upon commencement and upon any renewal by a majority of the independent directors of a risk retention group; and

(C)

be approved by the insurance commissioner of the State in which such service provider is chartered;

(3)

unless the insurance commissioner of the State in which the risk retention group is chartered permits the governing body of a risk retention group to exercise the function as a whole, such risk retention group shall have an audit committee of its governing body with a written charter defining the purposes of the committee, which shall include—

(A)

providing oversight of—

(i)

the integrity of financial statements;

(ii)

compliance with legal and regulatory requirements;

(iii)

the qualifications, independence, and performance of auditors and actuaries; and

(iv)

the performance of service providers; and

(B)

reviewing the annual audited financial statements and quarterly statements with the management of the risk retention group;

(C)

reviewing the annual audited financial statements with the auditor of the risk retention group and, if advisable, reviewing quarterly financial statements with such auditor;

(D)

establishing policies with respect to risk assessment and risk management;

(E)

meeting separately and periodically, either directly or through designated representatives of the committee, with the management and auditor of the risk retention group;

(F)

reviewing with the auditor of the risk retention group any audit problems or difficulties and the response to such problems or difficulties by the management of the risk retention group;

(G)

establishing clear policies regarding the hiring of employees or former employees of the current or former auditor of the risk retention group;

(H)

requiring, through contract or negotiation, the auditor of the risk retention group to rotate partners with primary responsibility for the audit of the risk retention group and the partner responsible for reviewing such audit, in order to assure that no individual performs these services for more than five consecutive years; and

(I)

reporting regularly on the foregoing matters to the governing body of the group;

(4)

a risk retention group shall adopt and provide upon request to the members of such risk retention group governance standards that address—

(A)

the means of providing evidence of each the ownership interest of each member of the risk retention group;

(B)

the process by which the governing body of the risk retention group is elected by the members of the risk retention group;

(C)

qualification standards for and responsibilities of directors of the risk retention group;

(D)

access to the management and independent advisors of the risk retention group by the directors of the risk retention group;

(E)

compensation of directors of the risk retention group, if any;

(F)

orientation and education of directors of the risk retention group;

(G)

succession of management of the risk retention group; and

(H)

annual performance evaluations of the management, officers, and members of the risk retention group by the governing body of the risk retention group;

(5)

a risk retention group shall adopt a code of business conduct and ethics applicable to directors, officers, and employees of the risk retention group that address—

(A)

conflicts of interest;

(B)

corporate opportunities;

(C)

confidentiality;

(D)

fair dealing;

(E)

protection and proper use of the assets of the risk retention group;

(F)

compliance with applicable laws and regulations; and

(G)

reporting of any illegal or unethical behavior which affects the operation of the risk retention group; and

(6)

any manager or chief executive officer of a risk retention group shall promptly notify the domestic regulator in writing if either becomes aware of any material noncompliance with any governance standard required by this section, if such noncompliance is not cured within a reasonable period from detection not to exceed 60 days.

(b)

Definitions

In this section:

(1)

Auditor

The term auditor means the person providing certification of the annual financial statement of a risk retention group provided to a State in section 3(d)(3).

(2)

Director

The term director means a member of the governing body of a risk retention group.

(3)

Independent director

The term independent director means a director of a risk retention group that the governing body of such risk retention group determines has no material relationship with—

(A)

such risk retention group;

(B)

a member of such risk retention group; or

(C)

an officer, director, or employee of such member.

(4)

Material relationship

The term material relationship means a relationship between an entity or an individual and a risk retention group where such entity or individual, or a member of the immediate family of such individual or any business with which such individual or entity is affiliated, receives compensation or payment from such risk retention group during any 12-month period in an amount of—

(A)

5 percent or more of the gross written premiums of such risk retention group for such 12-month period; or

(B)

2 percent or more of the surplus of such risk retention group as measured at the end of any fiscal quarter falling within such 12-month period.

(5)

Member

The term member means a person or entity that—

(A)

is insured by a risk retention group; and

(B)

maintains an ownership interest in such risk retention group in accordance with the laws of the State in which such risk retention group is domiciled.

(6)

Service provider

The term service provider means—

(A)

a provider of regular ongoing insurance, corporate, or regulatory services to a risk retention group, including management companies, auditors, accountants, actuaries, investment advisors, lawyers, manager general underwriters, and any other parties responsible for underwriting, determining rates, collecting premiums, adjusting and settling claims or the preparation of financial statements;

(B)

does not include defense counsel retained by a risk retention group to defend claims, unless the amount of fees paid to such counsel would otherwise result in it having a material relationship with the risk retention group.

(c)

Supersedure

(1)

In general

The provisions of this section shall supersede any State law relating to the corporate governance standards required for risk retention groups and purchasing groups.

(2)

Definitions

In this subsection:

(A)

State

The term State includes a State and the District of Columbia, any political subdivisions thereof, and any agency or instrumentality of a State.

(B)

State law

The term State law includes all laws, decisions, rules, regulations, or other State action having the effect of law, of any State.

.

4.

Commercial property insurance

The Liability Risk Retention Act of 1986 (15 U.S.C. 3901 et seq.) is further amended—

(1)

in section 2 (15 U.S.C. 3901)—

(A)

in subsection (a)—

(i)

in paragraph (4)—

(I)

in subparagraph (C)(i) by striking a liability and inserting an; and

(II)

in subparagraph (G)(i), by inserting or commercial property after liability;

(ii)

in paragraph (5)(A), by inserting or commercial property after liability;

(iii)

in paragraph (6), by striking and at the end;

(iv)

in paragraph (7)(B), by striking the final period and inserting ; and; and

(v)

by adding at the end the following new paragraph:

(8)

commercial property insurance means insurance that indemnifies a business, nonprofit organization, or governmental entity for damage to, theft of, or destruction of real property or business property, owned by or leased to such business, nonprofit organization, or governmental entity, including insurance that indemnifies a business, nonprofit organization, or governmental entity for damage to, theft of, or destruction of furniture, fixtures, and inventory, from any and all perils or causes of loss and against consequential loss or damage, including business interruption, other than noncontractual legal liability for such loss or damage.

; and

(B)

in subsection (b), by inserting , commercial property after of liability;

(2)

in section 3 (15 U.S.C. 3902)—

(A)

in subsection (a)(1)(C), by inserting or commercial property after liability;

(B)

in subsection (b), by inserting or commercial property after liability each place it appears; and

(C)

in subsection (d)(1)(B), by inserting or commercial property after liability;

(3)

in section 4 (15 U.S.C. 3903)—

(A)

in subsection (b)—

(i)

in paragraph (1), by inserting or commercial property after liability; and

(ii)

in paragraph (2)—

(I)

by redesignating subparagraphs (B) and (C) as subparagraphs (C) and (D), respectively; and

(II)

by inserting after subparagraph (A) the following new subparagraph:

(B)

commercial property insurance;

; and

(B)

in subsection (d)(1)(B), by inserting and commercial property after liability; and

(4)

in section 6(b) (15 U.S.C. 3905(b)), by inserting or commercial property after liability each place it appears.

5.

Financial statements; disclosure requirements; fiduciary duty; and underscoring the exemption

The Liability Risk Retention Act of 1986 is amended as follows:

(1)

Financial statements

In section 3(d)(3) (15 U.S.C. 3902(d)(3))—

(A)

by redesignating subparagraphs (A) and (B) as clauses (i) and (ii), respectively, and moving the margins two ems to the right;

(B)

by striking which statement shall be certified and inserting which statement shall—

(A)

be certified

;

(C)

in subparagraph (A)(ii) (as designated by subparagraphs (A) and (B)), by striking the period and inserting a semicolon; and

(D)

by adding at the end the following new subparagraphs:

(B)

be filed not later than the earlier of—

(i)

June 1, for the preceding calendar year; and

(ii)

such time as the State in which the risk retention group is chartered requires; and

(C)

if not prepared in conformity with statutory accounting principles, include appropriate notes for conversion of such statement to statutory accounting principles.

.

(2)

Disclosure requirements

In section 3 (15 U.S.C. 3902)—

(A)

in subsection (a)(1)—

(i)

in subparagraph (G), by striking jurisdiction; and inserting jurisdiction; and;

(ii)

in subparagraph (H), by striking impaired; and and inserting impaired.; and

(iii)

by striking subparagraph (I); and

(B)

by adding at the end the following new subsection:

(i)

Each risk retention group shall provide to each member of such group, on the front page and the declaration page of each insurance policy issued by such group, in bold 12-point or larger type, the following notice: This policy is issued by your risk retention group of which you are a part owner. Your risk retention group is primarily regulated under the laws of ______ and may not be subject to all of the insurance laws and consumer protections of your State. If your risk retention group fails, it may not be protected by a State insurance insolvency guaranty fund.. The risk retention group shall insert the name of the State in which the risk retention group is chartered or licensed in place of the blank space.

.

(3)

Fiduciary duty

In section 3 (15 U.S.C. 3902) by adding at the end the following new subsection:

(j)

The board of directors of a risk retention group shall have a fiduciary duty to operate in the best interests of the group.

.

(4)

Underscoring the exemption

(A)

in section 3 (15 U.S.C. 3902)—

(i)

in subsection (a) in the matter preceding paragraph (1), by striking Except as provided and inserting Except as specifically provided; and

(ii)

in subsection (f)(1), by inserting or purchasing group after risk retention group; and

(B)

in section 4(a) in the matter preceding paragraph (1) (15 U.S.C. 3903(a)), by striking Except as provided and inserting Except as specifically provided.

6.

Study on unlawful State regulation of risk retention groups

(a)

Study

The Comptroller General of the United States shall conduct a study of—

(1)

instances where nondomiciliary States attempt to unlawfully regulate, directly or indirectly, the operation of risk retention groups through unilateral cease and desist orders or other means;

(2)

costs to risk retention groups associated with State actions referred to in paragraph (A) above, including but not limited to legal fees and cessation of business operations;

(3)

the ability of risk retention groups to pay for costs associated with challenging nondomiciliary States that violate the Liability Risk Retention Act of 1986 (15 U.S.C. 3901 et seq.) by applying their laws in an extra-territorial manner; and

(4)

possible legislative solutions that would reinforce and underscore the foundation of the Liability Risk Retention Act of 1986, which exempts risk retention groups and purchasing groups from laws of a State other than their chartering State, except as specifically provided in the Act as well as ways to reduce or eliminate costs if a particular risk retention group prevails in a State or Federal court of competent jurisdiction.

(b)

Report

Not later than 1 year after the date of the enactment of this Act, the Comptroller General shall submit to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives a report containing the results of the study under subsection (a) and any recommendations for actions that Congress should consider to ensure that States do not interfere with or regulate, directly or indirectly, risk retention groups or purchasing groups in an extra-territorial manner precluded by sections 3 and section 4 of the Liability Risk Retention Act of 1986 (15 U.S.C. 3902 and 3903).

(c)

Definitions

In this section, the terms risk retention group and purchasing group have the meaning given such terms in section 2 of the Liability Risk Retention Act of 1986 (15 U.S.C. 3901).

7.

Technical correction and amendment to short title

(a)

Technical Correction

Section 3(a)(1) of the Liability Risk Retention Act of 1986 (15 U.S.C. 3902(a)(1)) is amended by striking many and inserting any.

(b)

Short Title

Section 1 of the Liability Risk Retention Act of 1986 (15 U.S.C. 3901 note) is amended by striking Liability Risk Retention Act and inserting Risk Retention Act.

8.

Effective date

The amendments made by sections 3, 4, and 5 shall take effect on the date that is 18 months after the date of the enactment of this Act.