Cal. Code Regs. tit. 10, § 2534.5 – Separate Accounts.

(a) Establishment and Administration of Separate Accounts. An insurer issuing variable life insurance in this State shall establish one or more separate accounts pursuant to Section 10506 of the Insurance Code of this State.
1. (1) If no law or other regulation provides for the custody of separate account assets and if the insurer itself is not the custodian of such assets, all contracts for such custody shall be in writing and the Commissioner of the insurer's state of domicile shall approve of both the terms of any such contract and the proposed custodian prior to the transfer of custody.
2. (2) An insurer shall not, without the prior written approval of the Commissioner, employ in any material connection with the handling of separate account assets any person who:
  1. (A) Within the last ten years has been convicted of any felony or a misdemeanor arising out of such persons conduct involving embezzlement, fraudulent conversion, or misappropriation of funds or securities or involving violation of Sections 1341, 1342, or 1343 of Title 18, United States Code, or
  2. (B) Within the last ten years has been found by any state regulatory authority to have violated or has acknowledged violation of any provision of any state insurance law involving fraud, deceit or knowing misrepresentation, or
  3. (C) Within the last ten years has been found by federal or state regulatory authorities to have violated or has acknowledged violation of any provision of federal or state securities laws involving fraud, deceit or knowing misrepresentation.
3. (3) All persons with access to the cash, securities or other assets of the separate account shall be under bond in an amount of not less than the following amounts for each separate account:
  TOTAL ASSETS
  MINIMUM AMOUNT OF BOND
  Under $100,000
  $10,000
  But Not
  More Than:
  More Than:
  $100,000
  $600,000
  $10,000 plus 4% of assets over $100,000
  600,000
  1,200,000
  $30,000 plus 3-1/3% of assets over $600,000
  1,200,000
  3,200,000
  $50,000 plus 2-1/2% of assets over $1,200,000
  3,200,000
  4,450,000
  $100,000 plus 2% of assets over $3,200,000
  4,450,000
  6,450,000
  $125,000 plus 1-1/4% of assets over $4,450,000
  6,450,000
  90,450,000
  $150,000 plus 5/8% of assets over $6,450,000
  90,450,000
  350,450,000
  $675,000 plus 3/8% of assets over $90,450,000
  350,450,000
  1,070,450,000
  $1,625,000 plus 3/16% of assets over $350,450,000
  1,070,450,000
  ------
  $3,075,000 plus 3/32% of assets over $1,070,450,000 until total bond equals $5,000,000
4. (4) If an insurer establishes more than one separate account for variable life insurance, justification for the establishment of each additional separate account shall also be filed with the Commissioner and shall be subject to his approval. The creation of additional separate accounts to avoid lower maximum charges against the separate account is prohibited.
5. (5) The assets of such separate accounts established for variable life insurance policies shall be valued at least as often as variable benefits are determined but in any event at least monthly.
6. (6) The same separate account shall not be used to fund both variable life insurance policies which are exempt pursuant to Section 3(c)(11) of the Investment Company Act of 1940 because of their tax qualified status and other variable life insurance policies not so exempt.
7. (7) Except as provided in Section 2534.3(e)(3)(F), variable life insurance separate accounts shall not be used for variable annuities or for the investment of funds corresponding to dividend accumulations or other policyholder liabilities not involving life contingencies.
(b) Amounts in the Separate Account.
1. (1) The insurer shall maintain in each variable life insurance separate account assets with a fair market value at least equal to the greater of the valuation reserves for the variable portion of the variable life insurance policies or the benefit base for such policies.
2. (2) The benefit base of any variable life insurance policy as of the beginning of any valuation period shall not be less than the sum of the following factors after deducting amounts of any indebtedness pursuant to Section 2534.3(d)(2):
  1. (A) The valuation net premium for such period based upon the initial amount insured, and
  2. (B) The valuation terminal reserve at the end of the immediately preceding valuation period based upon the amount insured at the end of such period less the discounted cost of term insurance for the next period based upon tabular mortality and the interest rate used for such valuation reserves.
3. (3) In lieu of the minimum benefit base requirement specified above, an insurer may otherwise qualify under this Section if it can be demonstrated, to the satisfaction of the Commissioner, that the policy benefits obtained over a 20-year period from the date of issue by the use of the insurer's benefit base are at least substantially equivalent in value to the benefits obtained by the use of the minimum benefit base specified above. The Commissioner may specify the range of net investment return to be used in this demonstration.
4. (4) Notwithstanding the actual reserve basis used for policies that do not meet standard underwriting requirements, the benefit base for such policies may be the same as for corresponding policies which do meet standard underwriting requirements.
(c) Investments by the Separate Account.
1. (1) No sale, exchange or other transfer of assets may be made by an insurer or any of its affiliates between any of its separate accounts or between any other investment account and one or more of its separate accounts unless:
  1. (A) In case of a transfer into a separate account, such transfer is made solely to establish the account or to support the operation of the policies with respect to the separate account to which the transfer is made, and
  2. (B) Such transfer, whether into or from a separate account, is made by a transfer of cash, but other assets may be transferred if approved by the Commissioner in advance.
2. (2) Assets allocated to a variable life insurance separate account shall be held in cash or investments having a reasonably ascertainable market price. For the purposes of this subsection, only the following shall be considered “investments having a reasonably ascertainable market price”:
  1. (A) Liens in favor of the insurer against separate account policy reserves resulting from use by policyholders of cash values;
  2. (B) Securities listed and traded on the New York Stock Exchange, the American Stock Exchange or regional stock exchanges or successors to such exchanges having the same or similar qualifications;
  3. (C) Securities listed on the NASDAQ System;
  4. (D) Shares of an investment company registered pursuant to the Investment Company Act of 1940. Where such an investment company issues book shares in lieu of share certificates, such book shares shall be deemed to be adequate evidence of ownership;
  5. (E) Obligations of or guaranteed by the United States government, the Canadian government, any state, or municipality or governmental subdivision of a state;
  6. (F) Commercial paper issued by business corporations when the total of such paper issued by the corporation does not exceed in value a guaranteed short line of credit by a bank.
  7. (G) Certificates of deposit issued by financial institutions the deposits of which are insured by the FDIC or FSLIC, and
  8. (H) New bond or debt issues which may reasonably be expected to be listed on an exchange regulated by the Securities Exchange Act of 1934.
3. (3) Notwithstanding any other provision of law or the provisions of paragraph (2) above, assets allocated to a variable life insurance separate account shall not be invested in:
  1. (A) Commodities or commodity contracts;
  2. (B) Put and call options or combinations of such options;
  3. (C) Short sales;
  4. (D) Purchases on margins;
  5. (E) Letter or restricted stock;
  6. (F) Units or other evidences of ownership of a separate account of another insurer, except those registered under the Investment Company Act of 1940, or
  7. (G) Real estate other than shares of a real estate investment trust listed as described in paragraph (2) above.
(d) Limitations on Ownership.
1. (1) A variable life insurance separate account shall not purchase or otherwise acquire the securities of any issuer, other than securities issued or guaranteed as to principal and interest by the United States, if immediately after such purchase or acquisition the value of such investment, together with prior investments of such separate account in such security valued as required by this regulation, would exceed 10% of the value of the assets of the separate account. The Commissioner may waive this limitation in writing if he believes such waiver will not render the operation of the separate account hazardous to the public or the policyholders in this State.
2. (2) No separate account shall purchase or otherwise acquire the voting securities of any issuer if as a result of such acquisition the insurer and its separate accounts, in the aggregate, will own more than 10% of the total issued and outstanding voting securities of such issuer. The Commissioner may waive this limitation in writing if he believes such waiver will not render the operation of the separate account hazardous to the public or the policyholders in this State or jeopardize the independent operation of the issuer of such securities.
3. (3) The percentage limitation specified in paragraph (1) above, shall not be construed to preclude the investment of the assets of separate accounts in shares of investment companies registered pursuant to the Investment Company Act of 1940 if the investments and investment policies of such investment companies comply substantially with the provisions of subsection (c) of this Section and other applicable portions of this regulation.
(e) Valuation of Assets of a Variable Life Insurance Separate Account.
1. (1) Investments of the separate account shall be valued at their market value on the date of valuation.
  1. (A) Market value for investments traded on the recognized exchanges means the last reported sale price on the date of valuation. If there has been no sale on that date, the market value means the last report bid quotation on the date of valuation.
  2. (B) Market value for investments listed on the NASDAQ System means the last representative bid quotation on the valuation date. If an investment ceases to be listed but continues to be traded over the counter, it shall be valued at the lowest bid quotation as it appears on the National Quotation Bureau sheets.
  3. (C) If the valuation date referred to in subparagraphs (A) and (B) above is a day when the exchange or the NASDAQ System is not open for business, the valuation date shall be the last date when the exchange or the NASDAQ System was open for business.
2. (2) If an investment ceases to be traded, it shall be valued at fair value as determined in good faith by or at the direction of the Board of Directors of the insurer but not in excess of the last reported bid quotation. Within thirty days notification of cessation of trading of any investment shall be reported by the insurer to the Insurance Commissioner of the state of domicile of the insurer. Such Commissioner shall within a reasonable period of time determine the method of valuation or disposition of such investment.
(f) Separate Account Investment Policy.
1. (1) The investment policy of a separate account operated by a domestic insurer filed under Section 2534.2(b)(3) shall not be changed without the approval of the Commissioner.
2. (2) With respect to changes of investment policy for which the Commissioner must give his approval, the following regulations shall apply:
  1. (A) Such approval shall be deemed to be given sixty days after the date the request for approval was filed with the Commissioner, unless he notifies the insurer before the end of such sixty day period of his determination that the proposed change is a material change in the investment policy.
  2. (B) If the change is deemed material by the Commissioner, he shall approve such change only if he determines, after a public hearing, that the change does not appear to be detrimental to the interest of the policyholders of the insurer.
  3. (C) At least thirty days prior to any public hearing under subparagraph (B), the insurer shall mail a notice to each policyholder and to the Insurance Commissioner of each state in which the affected variable life insurance policies are being sold. Such notice shall describe the proposed change in investment policy, list the reasons therefor, designate the date and place of the public hearing, inform the policyholder of the procedures to be followed in commenting on the change, and describe the conduct of the meeting. Any such notice shall be in a form approved by the Commissioner.
  4. (D) Within sixty days after such public hearing the Commissioner must approve or deny the proposed change in investment policy.
  5. (E) Should any policyholder object to the proposed change and the change is allowed by the Commissioner, the objecting policyholder shall be given the option within sixty days of notification to the policyholder of the approval by the Commissioner of such change, of converting, without evidence of insurability, under one of the following options, to a fixed benefit life insurance policy issued by the insurer or an affiliate:
    1. (1) As of the original issue age to a permanent form of life insurance, based on the insurer's premium rates for fixed life insurance at the original issue age, for an amount of insurance not exceeding the death benefit of the variable life insurance policy on the date of conversion. If the cash value of the variable life insurance policy exceeds the cash value of the fixed life insurance policy, the difference shall be paid to the policyholder. If the cash value of the fixed life insurance policy exceeds the cash value of the variable life insurance policy, the difference shall be paid by the policyholder;
    2. (2) As of the attained age to a substantially comparable permanent form of life insurance for an amount of insurance not exceeding the excess of the death benefit of the variable life insurance policy over:
      1. (i) Its cash value on the date of conversion if the withdrawing policyholder elects the cash surrender option, or
      2. (ii) The death benefit payable under any paid-up insurance option if the withdrawing policyholder elects such option.
(g) Charges Against a Variable Life Insurance Separate Account.
1. (1) The insurer may deduct only the following from the separate account:
  1. (A) Taxes or reserves for taxes attributable to investment gains and income of the separate account;
  2. (B) Actual cost of reasonable brokerage fees and similar direct acquisition and sales costs incurred in the purchase or sale of separate account assets;
  3. (C) Actuarially determined costs of insurance (tabular costs) and the release of reserves on the termination or partial surrender of the variable life insurance policy;
  4. (D) Charges for investment management expenses, including internal costs attributable to the investment management of assets of the separate account, not exceeding the following percentages, on an annual basis, of the average net asset value of the separate account as of the dates of valuation under subsection (a)(5) of this Section:
    1. 1. .75% of that portion of separate account assets valued under $75,000,000; and;
    2. 2. .50% of that portion of separate account assets valued at or in excess of $75,000,000 but less than $150,000,000; and;
    3. 3. .40% of that portion of separate account assets valued at or in excess of $150,000,000 but less than $400,000,000; and;
    4. 4. .35% of that portion of separate account assets valued at or in excess of $400,000,000 but less than $800,000,000; and;
    5. 5. .30% of that portion of separate account assets valued at or in excess of $800,000,000.
  5. (E) A charge, at a rate specified in the policy, not to exceed .50% per year of the average net asset value of the separate account as of the dates of valuation under subsection (a)(5) of this Section for mortality and expense guarantees.
2. (2) Any charges against the separate account made by either an affiliate of the insurer or an unaffiliated fund shall be considered part of the charges limited by paragraphs (1)(d) and (1)(E) of subsection (g) above. Any charge against the separate account, excluding taxes, shall not vary in accordance with the difference between the investment performance of the separate account and any index of securities prices or other measure of investment performance.
(h) Standards of Conduct. Every insurer seeking approval to enter into the variable life insurance business in this State shall adopt by formal action of its Board of Directors and file with the Commissioner, a written statement specifying the Standards of Conduct of the insurer, its officers, directors, employees, and affiliates with respect to investments of variable life insurance separate accounts and variable life insurance operations. Such Standards of Conduct shall be binding on the insurer and those to whom it refers, and must contain at a minimum the items contained in subsection (i)(2) of this Section.
(i) Conflicts of Interest.
1. (1) Rules under any provision of the Insurance Code of this State or any regulation applicable to the officers and directors of insurance companies with respect to conflicts of interest shall also apply to members of any separate account's committee or other similar body. No officer or director of such company nor any member of any managing committee or body of a separate account shall receive directly or indirectly any commission or any other compensation with respect to the purchase or sale of assets of such separate account. The Board of Directors of the insurer shall be responsible for all acts concerning the separate account.
2. (2) Unless otherwise approved in writing by the Commissioner in advance of the transaction, with respect to variable life insurance separate accounts, an insurer or affiliate thereof shall not:
  1. (A) Sell to or purchase from any such separate account established by the insurer any securities or other property, other than variable life insurance policies;
  2. (B) Purchase or allow to be purchased for any such separate account any securities of which the insurer or an affiliate is the issuer;
  3. (C) Accept any compensation, other than a regular salary or wages from such insurer or affiliate, for the sale or purchase of securities to or from any such separate account other than as provided in subsection (i)(3)(C) of this Section;
  4. (D) Engage in any joint transaction, participation or common undertaking whereby such insurer or an affiliate participates with such a separate account in any transaction in which an insurer or any of its affiliates obtains an advantage in the price or quality of the item purchased, in the service received, or in the cost of such service and the insurer or any of its other affiliates is disadvantaged in any of these respects by the same transaction;
  5. (E) Borrow money or securities from any such separate account other than under a policy loan provision.
3. (3) No provision of this regulation shall be construed to prohibit:
  1. (A) The investment of separate account assets in securities issued by one or more investment companies pursuant to the Investment Company Act of 1940 which is sponsored or managed by the insurer or an affiliate, and the payment of investment management or advisory fees on such assets;
  2. (B) The combination of orders for the purchase or sale of securities for the insurer, an affiliate thereof, any separate account, or any one or more of them, which is for their mutual benefit or convenience so long as any securities so purchased or the proceeds of any sale thereof are allocated among the participants on some predetermined basis expressed in writing which is designed to assure the equitable treatment of all participants;
  3. (C) An insurer or an affiliate to act as a broker or dealer in connection with the sale of securities to or by such separate account; however, any commission, fee or other remuneration charged therefor shall not exceed the minimum broker's commission established for any such transaction by any national securities exchange through which such transaction could be effected or where such charges prevailing, in the ordinary course of business in the community where such transaction is effected;
  4. (D) The rendering of investment management or investment advisory services by an insurer or affiliate, for a fee, subject to the provisions of this regulation.
4. (4) The Commissioner may, upon the written request of an insurer or an affiliate, approve a particular transaction or series of proposed transactions which would otherwise be prohibited under paragraph (2) if he determines such transaction is not unfair or inequitable to persons affected under the circumstances of such transactions.
(j) Investment Advisory Services to a Separate Account.
1. (1) An insurer shall not enter into a contract under which any person undertakes, for a fee, to regularly furnish investment advice to such insurer with respect to its separate accounts maintained for variable life insurance policies unless:
  1. (A) The person providing such advice is registered as an investment advisor under the Investment Advisors Act of 1940, or
  2. (B) The insurer has filed with the Commissioner and continues to file annually the following information and statements concerning the proposed advisor:
    1. 1. The name and form of organization, state of organization, and its principal place of business;
    2. 2. The names and addresses of its partners, officers, directors, and persons performing similar functions or, if such an investment advisor be an individual, of such individual;
    3. 3. A written Standard of Conduct complying in substance with the requirements of subsection (h) of this Section which has been adopted by the investment advisor and is applicable to the investment advisor, its officers, directors, and affiliates;
    4. 4. A statement provided by the proposed advisor as to whether the advisor or any person associated therewith:
      1. (i) Has, within the last ten years, been convicted or has acknowledged violation of any felony or misdemeanor arising out of such person's conduct as an employee, salesman, officer or director of an insurance company, a bank, an insurance agent, a securities broker, or an investment advisor; involving embezzlement, fraudulent conversion, or misappropriation of funds or securities, or involving the violation of Sections 1341, 1342, or 1343 of Title 18 of the United States Code;
      2. (ii) Has been permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from acting as an investment advisor, underwriter, broker, or dealer, or as an affiliated person or as an employee of any investment company, bank, or insurance company, or from engaging in or continuing any conduct or practice in connection with any such activity;
      3. (iii) Has been found by federal or state regulatory authorities to have willfully violated or has acknowledged willful violation of any provision of federal or state securities laws or state insurance laws or of any rule or regulation under any such laws, or
      4. (iv) Has been censured, denied an investment advisor registration, had a registration as an investment advisor revoked or suspended or been barred or suspended from being associated with an investment advisor by order of federal or state regulatory authorities, and
  3. (C) Such investment advisory contract shall be in writing and provide that it may be terminated by the insurer without penalty to the insurer or the separate account upon no more than sixty days written notice to the investment advisor.
2. (2) The Commissioner may, after notice and opportunity for hearing, by order require such investment advisory contract to be terminated if he deems continued operation thereunder to be hazardous to the public or the insurance company's policyholders.

The following requirements apply to the establishment and administration of variable life insurance separate accounts: