Sec. 31.09.02.06. Separate Accounts

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

A. Establishment and Administration of Separate Accounts.

(1) An insurer issuing variable life insurance in this State shall establish one or more separate accounts pursuant to Insurance Article, §§16-601-16-603, Annotated Code of Maryland.

(2) Assets in the separate account shall be owned by the insurer and the insurer may not be, or hold itself out to be, a trustee with respect to these assets. If and to the extent so provided under the applicable contracts, that portion of the assets of the separate account equal to the reserves and other contract liabilities with respect to the account may not be chargeable with liabilities arising out of any other business the insurer may conduct.

(3) If no law or other regulation provides for the custody of separate account assets and if the insurer itself is not the custodian of these assets, all contracts for custody shall be in writing and the Commissioner of the insurer's state of domicile shall approve of both the terms of the contract and the proposed custodian before the transfer of custody.

(4) Without the prior written approval of the Commissioner, an insurer may not employ in any material connection with the handling of separate account assets any person who:

(a) Within the last 10 years has been convicted of any felony, or of a misdemeanor arising out of this person's conduct involving embezzlement, fraudulent conversion, or misappropriation of funds or securities or involving violation of 18 U.S.C. §1341, 1342, or 1343;

(b) Within the last 10 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;

(c) Within the last 10 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; or

(d) Within the past 10 years has signed a consent order with any federal or state regulatory authority that it will not in the future engage in any of the aforementioned violations.

(5) A person 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 greater of $500,000 or 25 percent of the assets to which the person has access, but the bond need not exceed 5 million dollars.

(6) 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 the Commissioner's approval. The creation of additional separate accounts to avoid lower maximum charges against the separate account is prohibited.

(7) The assets of the 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.

(8) A separate account exempt pursuant to the federal Investment Company Act of 1940, §3(c)(11), because of the tax qualified status of the policies funded thereby, may not be used to fund other variable life insurance policies.

(9) Except for separate accounts exempt pursuant to the federal Investment Company Act of 1940, §3(c)(11), variable life insurance separate accounts may 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) 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 the policies.

(2) The benefit base of any variable life insurance policy as of the beginning of any valuation period may not be less than the sum of the following factors after deducting amounts of any indebtedness pursuant to Regulation .04E(2) of this chapter:

(a) The valuation net premium for this period, for the variable portion of the policy, minus the discounted cost of term insurance for this period, based on the tabular mortality and interest rates used in determining valuation reserves; and

(b) The valuation terminal reserve, for the variable portion of the policy, at the end of the immediately preceding valuation period adjusted for the net investment return of the preceding period.

(3) In lieu of the minimum benefit base requirement specified in §B(1) and (2) of this regulation, 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) Notwithstanding the actual reserve basis used for policies that do not meet standard underwriting requirements, the benefit base for these policies may be the same as for corresponding policies which do meet standard underwriting requirements.

C. Investments by the Separate Account.

(1) A sale, exchange, or other transfer of assets may not 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:

(a) In case of a transfer into a separate account, the 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

(b) The 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) Assets allocated to a variable life insurance separate account shall be held in cash or investments having a reasonably ascertainable market price. For purposes of this subsection, only the following shall be considered investments having a reasonably ascertainable market price:

(a) Liens in favor of the insurer against separate account policy reserves resulting from use by policyholders of cash values.

(b) Securities listed and traded on the New York Stock Exchange, the American Stock Exchange, or regional stock exchanges or successors to these exchanges having the same or similar qualifications.

(c) Securities listed on the NASDAQ System.

(d) Shares of an investment company registered pursuant to the federal Investment Company Act of 1940. When the investment company issues book shares in lieu of share certificates, the book shares shall be deemed to be adequate evidence of ownership.

(e) Obligations of or guaranteed by the United States Government, the Canadian government, any state, or municipality or governmental subdivision of a state.

(f) Commercial paper issued by business corporations when the total of the paper issued by the corporation does not exceed in value a guaranteed short line of credit by a bank.

(g) Certificates of deposit issued by financial institutions the deposits of which are insured by the FDIC or FSLIC.

(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) Not more than 25 percent of the assets allocated to a variable life insurance separate account may be invested in non-dividend paying stock, and then only if the issuer of this stock has not had a net operating loss in more than two of its twelve fiscal quarters immediately preceding the date of purchase of the stock, or has not had a net operating loss in more than two of its fiscal quarters from the date of its incorporation if it has not been incorporated for at least 3 years before the date of purchase of the stock.

(4) Notwithstanding any other provision of law or the provisions of §C(2)of this regulation, assets allocated to a variable life insurance separate account may not be invested in:

(a) Commodities or commodity contracts;

(b) Put and call options or combinations of these options;

(c) Short sales;

(d) Purchases on margins;

(e) Letter or restricted stock;

(f) Units or other evidences of ownership of a separate account of another insurer, except those registered under the federal Investment Company Act of 1940; or

(g) Real estate or shares of a real estate investment trust except that up to 5 percent of the assets allocated to a variable life insurance separate account may be invested in the shares of real estate investment trusts listed as described in §C(2)(b) of this regulation.

D. Limitations on Ownership.

(1) A variable life insurance separate account may 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 this purchase or acquisition, the value of the investment, together with prior investments of the separate account in the security valued as required by these regulations, would exceed the greater of 5 percent of the value of the assets of the separate account or $10,000. The Commissioner may waive this limitation in writing if he believes the waiver will not render the operation of the separate account hazardous to the public or the policyholders in this State.

(2) A separate account may not purchase or otherwise acquire the voting securities of any issuer if as a result of the acquisition the insurer and its separate accounts, in the aggregate, will own more than 5 percent of the total issued and outstanding voting securities of the issuer. The Commissioner may waive this limitation in writing if he believes the 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 these securities.

(3) The percentage limitation specified in §D(1) of this regulation may not be construed to preclude the investment of the assets of separate accounts in shares of investment companies registered pursuant to the federal Investment Company Act of 1940, if the investments and investment policies of these investment companies comply substantially with the provisions of §C of this regulation, and other applicable portions of this regulation.

E. Valuation of Assets of a Variable Life Insurance Separate Account.

(1) Market Value.

(a) Investments of the separate account shall be valued at their market value on the date of valuation.

(b) 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 reported bid quotation on the date of valuation.

(c) 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.

(d) If the valuation date referred to in §E(1)(b) and (c) of this regulation 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) 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 30 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. That commissioner shall within a reasonable period of time determine the method of valuation or disposition of this investment.

F. Separate Account Investment Policy.

(1) The investment policy of a separate account operated by a domestic insurer filed under Regulation .03B(3) of this chapter may not be changed without the approval of the Insurance Commissioner.

(2) With respect to changes of investment policy for which the Commissioner must give his approval, the following regulations shall apply:

(a) Approval shall be deemed to be given 60 days after the date the request for approval was filed with the Commissioner, unless he notified the insurer before the end of the 60-day period of his determination that the proposed change is a material change in the investment policy.

(b) If the change is deemed material by the Commissioner, he shall approve the change only if he determines, after a public hearing, that the change does not appear detrimental to the interest of the policyholders of the insurer.

(c) At least 30 days before any public hearing under §F(2)(b) of this regulation, 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. This notice shall describe the proposed change in investment policy, list the reasons, 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. This notice shall be in a form approved by the Commissioner.

(d) Within 60 days after the public hearing, the Commissioner shall approve or deny the proposed change in investment policy.

(e) If a policyholder objects to the proposed change and the change is allowed by the Commissioner, the objecting policyholder shall be given the option within 60 days of notification to the policyholder of the approval by the Commissioner of the 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:

(i) If the policy is in force on a premium paying basis, either:

(aa) Conversion as of the original issue age to a substantially comparable permanent form of fixed benefit life insurance, based on the insurer's premium rates for fixed benefit 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; or

(bb) Conversion as of the attained age to a substantially comparable permanent form of fixed benefit life insurance for an amount of insurance not exceeding the excess of the death benefit of the variable life insurance policy on the date of conversion over its cash value on the date of conversion if the policyholder elects to surrender the variable life policy for its cash value, or the death benefit payable under any paid-up insurance option if the policyholder elects the nonforfeiture option under the variable life policy.

(ii) If the policy is in force as paid-up variable life insurance, then conversion will be to a substantially comparable paid-up fixed benefit life insurance policy for an amount of insurance not exceeding the death benefit of the variable life insurance policy on the date of conversion. If conversion is made pursuant to §F(2)(e)(i)(aa) or F(2)(e)(ii) of this regulation then:

(aa) If the cash value of the variable life insurance policy exceeds the cash value of the fixed benefit life insurance policy, the difference shall be paid to the policyholder;

(bb) If the cash value of the fixed benefit life insurance policy exceeds the cash value of the variable life insurance policy, the difference shall be paid by the policyholder; and

(cc) Any indebtedness under the variable life insurance policy shall become indebtedness under the fixed benefit policy, provided that any excess of this indebtedness over the cash value of the fixed benefit policy on the date of conversion shall be deducted from any amount otherwise payable to the policyholder.

G. Charges Against a Variable Life Insurance Separate Account. The insurer shall disclose in writing, before or contemporaneously with delivery of the policy, each charge that may be made against the separate account, including:

(1) Taxes or reserves for taxes attributable to investment gains and income of the separate account;

(2) Actual cost of reasonable brokerage fees and similar direct acquisition and sales costs incurred in the purchase or sale of separate account assets;

(3) Actuarially determined costs of insurance (tabular costs) and the release of reserves and benefit base consistent with the release of separate account liabilities;

(4) Charges for administrative expenses and investment management expenses, including internal costs attributable to the investment management of assets of the separate account;

(5) A charge, at a rate specified in the policy for mortality and expense guarantees;

(6) Any amounts in excess of those required to be held in the separate account; and

(7) Charges for incidental insurance benefits.

H. Standards of Conduct. An 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. These standards of conduct shall be binding on the insurer and those to whom it refers and shall contain at a minimum the items contained in §I(2) of this regulation.

I. Conflicts of Interest.

(1) Rules under any provision of the insurance laws of this State or any regulation applicable to the officers and directors of insurance companies with respect to conflicts of interest shall apply also to members of any separate account's committee or other similar body. An officer or director of the company or any member of any managing committee or body of a separate account may not receive directly or indirectly a commission or other compensation with respect to the purchase or sale of assets of the separate account. The board of directors of the insurer shall be responsible for all acts concerning the separate account.

(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 of an insurer may not:

(a) Sell to or purchase from any separate account established by the insurer any securities or other property, other than variable life insurance policies;

(b) Purchase or allow to be purchased for any separate account securities of which the insurer or an affiliate is the insurer, or securities of a corporation in which an officer or director of the insurer or an affiliate or any member of the managing committee or body owns 3 percent or more of the common stock or shares;

(c) Accept compensation, other than a regular salary or wages from the insurer or affiliate, for the sale or purchase of securities to or from any separate account other than as provided in §I(3)(c) of this regulation;

(d) Engage in a joint transaction, participation, or common undertaking by which the insurer of an affiliate participates with any separate account in a transaction in which an insurer or any of its affiliates obtains an advantage in the price of quality of the item purchased, in the service received, or in the cost of the service, and the insurer or any of its other affiliates is disadvantaged in any of these respects by the same transaction;

(e) Borrow money or securities from any separate account other than under a policy loan provision.

(3) No provision of this chapter may be construed to prohibit:

(a) The investment of separate account assets in securities issued by one or more investment companies registered pursuant to the federal 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 the assets.

(b) The combination of orders for the purchase or sale of securities for the insurer, an affiliate, any separate accounts, or any one or more of them, which is for their mutual benefit or convenience as long as any securities so purchased or the proceeds of any sale of securities are allocated among the participants on some predetermined basis expressed in writing which is designed to assure the equitable treatment of all participants.

(c) An insurer or an affiliate to act as a broker or dealer in connection with the sale of securities to or by the separate account. However, a commission, fee, or remuneration charged may not exceed the minimum broker's commission established for any transaction by any national securities exchange through which the transaction could be effected, or when the charges are subject to negotiation, or when no minimum charge is applicable, then the charge shall be consistent with the charges prevailing in the ordinary course of business in the community where the transaction is effected.

(d) The rendering of investment management or investment advisory services by an insurer or affiliate, for a fee, subject to the provisions of this chapter.

(4) Upon the written request of an insurer or an affiliate, the Commissioner may approve a particular transaction or series of proposed transactions which would otherwise be prohibited under §I(2) of this regulation, if the Commissioner determines that this transaction is not unfair or inequitable to persons affected under the circumstances of the transactions.

J. Investment Advisory Services to a Separate Account.

(1) An insurer may not enter into a contract under which any person undertakes, for a fee, to regularly furnish investment advice to the insurer with respect to its separate accounts maintained for variable life insurance policies, unless:

(a) The person providing the advice is registered as an investment adviser under the federal Investment Advisers Act of 1940; or

(b) The insurer has filed with the Commissioner and continues to file annually the following information and statements concerning the proposed adviser:

(i) The name and form of organization, state of organization, and its principal place of business;

(ii) The names and addresses of its partners, officers, directors, and persons performing similar functions, or, if this investment adviser is an individual, of the individual;

(iii) A written standard of conduct complying in substance with the requirements of §H of this regulation, which has been adopted by the investment adviser and is applicable to the investment adviser, its officers, directors, and affiliates;

(iv) A statement provided by the proposed adviser as to whether the adviser or a person associated with the adviser:

(aa) Has been convicted within 10 years of any felony, or of a misdemeanor arising out of this 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 adviser, involving embezzlement, fraudulent conversion, or misappropriation of funds or securities, or involving the violation of 18 U.S.C. §1341, 1342, or 1343;

(bb) Has been permanently or temporarily enjoined by order, judgement, or decree of any court of competent jurisdiction from acting as an investment adviser, underwriter, broker, or dealer, or as an affiliated person or as an employee of an investment company, bank, or insurance company, or from engaging in or continuing conduct or practice in connection with any of these activities;

(cc) 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 these laws;

(dd) The adviser or a person associated with the adviser has within the last 10 years signed a consent order with a federal or state regulatory authority that the adviser or associated person may not in the future engage in any of the aforementioned violations; or

(ee) Has been censured, denied an investment adviser registration, had a registration as an investment adviser revoked or suspended, or been barred or suspended from being associated with an investment adviser by order of federal or state regulatory authorities; and

(c) The 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 60 days' written notice to the investment adviser.

(2) After notice and opportunity for hearing, the Commissioner may require, by order, the investment advisory contract to be terminated if he deems continued operation to be hazardous to the public or the insurer's policyholders.