NASAA Series 65 — All Questions

Under ERISA's minimum participation standards, a pension plan generally may not make an employee wait for participation beyond age 21 and completion of:

• a.One year of service with the employer✓
• b.Three years, the cliff-vesting maximum
• c.Five years, the defined benefit cliff limit
• d.Two years, even with only gradual vesting

Section 202 of ERISA bars a plan from conditioning participation on more than the later of age 21 or one year of service (a year of service is 1,000 hours in a 12-month period). A plan may be more generous. Two years is permitted only if the plan gives immediate 100 percent vesting, so it does not work with gradual vesting. Cliff-vesting periods of three and five years govern when employer contributions become nonforfeitable, not when an employee may join.ERISA s.202(a)(1) (29 U.S.C. 1052(a)(1))

Under the Uniform Securities Act (1956), the Administrator may examine the books and records of a registered investment adviser:

• a.Only after giving the firm thirty days' written notice of the examination
• b.Only with a subpoena issued by a court of proper jurisdiction
• c.At any reasonable time, within or outside the state, without prior notice✓
• d.Only when a written customer complaint has been filed against the firm

Section 203(d) makes the required records subject, at any time or from time to time, to reasonable periodic, special, or other examinations by the Administrator's representatives, within or outside the state, as the Administrator deems necessary or appropriate in the public interest or for the protection of investors. The Act sets no advance-notice period, does not make a subpoena or court order a precondition for examining records, and does not require a customer complaint first.Uniform Securities Act (1956) s.203(d)

An insurance company authorized to do business in a state issues both fixed and variable annuity contracts. Under the Uniform Securities Act (1956):

• a.Both contracts are exempt securities because the insurer is authorized
• b.The fixed annuity is not a security, but the variable annuity is a nonexempt security✓
• c.Neither contract is a security, so state registration can never apply
• d.The variable annuity is an exempt security, but the fixed annuity is not

Section 401(l) excludes from the definition of security an insurance policy or annuity contract under which the insurer promises to pay a fixed sum, so the fixed annuity is outside the securities laws. A variable annuity pays according to the results of a segregated investment account, so it is a security, and the Section 402(a)(5) exemption for insurer-issued securities expressly does not reach it. The variable contract must therefore be registered or otherwise exempt, and its seller must be registered. The insurer's authorization to do business in the state does not make both contracts exempt, and the variable contract is not the exempt one.Uniform Securities Act (1956) s.401(l); s.402(a)(5)

Under the Uniform Securities Act (1956), a customer telephones an agent of a registered broker-dealer and, without any prompting from the firm, asks to buy a nonexempt, unregistered security in a nonissuer transaction. This trade is:

• a.Permitted only when the customer is an accredited investor
• b.An exempt transaction, because the customer's order was unsolicited✓
• c.An exempt security, because the buyer initiated the contact first
• d.Prohibited, because the security is not registered in that state

Unsolicited nonissuer transactions are exempt TRANSACTIONS under the Uniform Securities Act, so the registration requirement does not attach even though the security itself is not registered or exempt. The Administrator may require the customer to sign an acknowledgment that the order was unsolicited. Note the vocabulary trap: the exemption attaches to the transaction, never to the security.Uniform Securities Act (1956) s.402(b)(3)

When the Federal Reserve raises the discount rate, the direct effect is that:

• a.Treasury bill prices rise as the Fed stops buying securities
• b.Borrowing from the Fed's discount window becomes more expensive for banks✓
• c.The rate banks charge one another overnight is fixed by the Fed at the new level
• d.Banks must hold a larger percentage of deposits as required reserves

The discount rate is the rate charged on discount-window loans to depository institutions, so raising it makes that borrowing costlier and signals tighter policy. Reserve requirements are a separate tool and are set at zero. Bill prices do not rise because of it. The federal funds rate is negotiated between banks; the Fed targets a range rather than fixing it.

A worker's nominal wages rise 2.1% over a year while the Consumer Price Index rises 3.2%. The worker's real wage has:

• a.Fallen about 1.1%, so purchasing power declined✓
• b.Risen about 1.1%, because nominal wages went up
• c.Fallen about 3.2%, the full rate of inflation
• d.Risen about 5.3%, the sum of the two rates

Real wage growth is approximately nominal growth minus inflation: 2.1% - 3.2% = -1.1%. Nominal gains do not raise purchasing power when prices rise faster. Only the gap between the rates matters, not inflation alone. Adding the rates would be correct only for a deflation of the same size.

Which combination describes stagflation?

• a.Falling prices together with slow output growth and high unemployment
• b.Rising prices together with strong output growth and low unemployment
• c.Rising prices together with slow output growth and high unemployment✓
• d.Stable prices together with slow output growth and high unemployment

Stagflation pairs inflation with weak growth and high joblessness, which is why tightening policy to cut prices tends to deepen the slowdown. Falling prices with weak output describe deflationary depression. Inflation with strong growth is an overheating economy. With stable prices, a weak economy is an ordinary recession.

A stock trades at a P/E ratio of 24, and analysts expect its earnings per share to grow 12% a year. Its PEG ratio is:

• a.288.0
• b.2.0✓
• c.0.5
• d.12.0

PEG is the P/E ratio divided by the expected annual earnings growth rate expressed in whole percent: 24 / 12 = 2.0. A result of 0.5 comes from inverting the division. Subtracting the growth rate gives 12, and multiplying the two figures gives 288; neither is a PEG ratio.

A company is expected to pay a dividend of $2.40 next year. Dividends are expected to grow 4% a year indefinitely, and investors require a 10% return. Under the constant-growth dividend discount model, the stock's value is:

• a.$17.14
• b.$24.00
• c.$40.00✓
• d.$60.00

Value = D1 / (r - g) = $2.40 / (0.10 - 0.04) = $2.40 / 0.06 = $40.00. Dividing by 10% alone ($24.00) ignores growth. Dividing by r plus g (14%) gives $17.14, and dividing by g alone (4%) gives $60.00; both misuse the denominator.

In the constant-growth dividend discount model, which change by itself would raise the estimated value of a stock?

• a.A wider spread between the required return and the dividend growth rate
• b.A lower expected dividend next year, with growth and required return unchanged
• c.A higher required return, with the expected dividend and growth rate unchanged
• d.A higher expected growth rate in dividends, required return unchanged✓

Value = D1 / (r - g). A higher g narrows the denominator and lifts value. A higher r or a larger r - g spread widens the denominator and lowers value, and a lower D1 shrinks the numerator.

The risk-free rate is 3%, the expected market return is 10%, and a stock has a beta of 1.2. Under the capital asset pricing model, the stock's required return is:

• a.13.0%
• b.8.4%
• c.12.0%
• d.11.4%✓

Required return = Rf + beta x (Rm - Rf) = 3% + 1.2 x 7% = 3% + 8.4% = 11.4%. Multiplying beta by the market return (12.0%) skips the risk-free rate and the premium. Using only beta times the premium (8.4%) omits Rf. Adding Rf and Rm (13.0%) ignores beta.

A stock is expected to return 9%, while the capital asset pricing model says it should return 11.4%. On a security market line graph, the stock plots:

• a.Above the line, so it is overpriced
• b.On the line, so it is fairly priced
• c.Below the line, so it is underpriced
• d.Below the line, so it is overpriced✓

A stock whose expected return falls short of the CAPM required return has a negative alpha and plots below the security market line; it offers too little return for its risk, so it is overpriced. Stocks above the line are underpriced. Only a stock whose expected return equals the required return sits on the line.

A portfolio earned 12% with a beta of 1.1. The risk-free rate was 3% and the market returned 9%. The portfolio's Jensen alpha is:

• a.+2.4%✓
• b.+3.0%
• c.-2.4%
• d.+9.6%

CAPM expected return = 3% + 1.1 x (9% - 3%) = 9.6%. Alpha = actual 12% - 9.6% = +2.4%. A +3.0% figure compares the portfolio with the market return and ignores beta. Reversing the subtraction gives -2.4%. The 9.6% is the benchmark return, not the excess over it.

A portfolio returned 11% with a beta of 1.25 when the risk-free rate was 3%. Its Treynor ratio is:

• a.6.4%✓
• b.2.4%
• c.8.8%
• d.10.0%

Treynor = (return - risk-free rate) / beta = 8% / 1.25 = 6.4%. Dividing the raw return by beta (8.8%) skips the risk-free rate. Multiplying the excess return by beta gives 10.0%, and dividing the risk-free rate by beta gives 2.4%; neither measures excess return per unit of systematic risk.

A portfolio on the efficient frontier offers:

• a.A guaranteed return equal to the risk-free rate
• b.The highest expected return available for its level of risk✓
• c.A higher return than every other portfolio at every level of risk
• d.The lowest standard deviation of any possible portfolio

The efficient frontier connects portfolios that give the most expected return for each level of risk. Only the global minimum-variance portfolio has the lowest standard deviation. Frontier portfolios trade off risk and return against one another, so none beats all others at every risk level. Frontier portfolios still carry risk.

Two assets whose returns have a correlation coefficient of +1.0 are combined in a portfolio. The portfolio's standard deviation is:

• a.The weighted average of the two standard deviations✓
• b.Zero, if the two assets are held in equal dollar amounts
• c.Lower than the weighted average, because some offsetting still occurs
• d.Higher than the weighted average, because the risks compound together

With perfect positive correlation the assets move in lockstep, so combining them offers no diversification and the portfolio's risk is exactly the weighted average. Any correlation below +1.0 pulls risk under that average. Risk cannot exceed the weighted average, because that is the maximum. Zero risk would require a correlation of -1.0 and specific weights.

Adding more unrelated stocks to a 20-stock portfolio mainly reduces:

• a.Interest rate risk on its bond holdings
• b.Unsystematic risk specific to individual companies✓
• c.Inflation risk on the portfolio's purchasing power
• d.Systematic risk that affects the whole market

Diversification averages out company-specific events, so unsystematic risk falls as holdings are added. Systematic risk cannot be diversified away within one market. Inflation and interest rate risk are market-wide exposures that more stocks do not remove, and interest rate risk concerns bonds rather than stocks.

Annual returns for a stock are normally distributed with a mean of 8% and a standard deviation of 10%. About 68% of annual returns should fall between:

• a.-12% and 28%
• b.-2% and 18%✓
• c.-22% and 38%
• d.0% and 16%

About 68% of outcomes lie within one standard deviation of the mean: 8% +/- 10% gives -2% to 18%. Two standard deviations (-12% to 28%) cover about 95%, and three (-22% to 38%) cover about 99.7%. The 0% to 16% band uses a deviation of 8%, which is the mean, not the spread.

A bond with positive convexity and no embedded options will see its price respond to a fall in yield by:

• a.Rising by exactly as much as it would fall for the same rise in yield
• b.Rising only if the issuer has the right to call it
• c.Rising by less than it would fall for a rise in yield of the same size
• d.Rising by more than it would fall for a rise in yield of the same size✓

Positive convexity means the price-yield curve bends upward, so gains from falling yields exceed losses from equal rises. Duration alone would predict equal moves in both directions. A callable bond tends to have negative convexity when yields fall, which is the opposite of the effect here.

A 10-year zero-coupon bond has a Macaulay duration of:

• a.10 years, equal to its time to maturity✓
• b.More than 10 years, because interest compounds
• c.5 years, the midpoint of its life
• d.Zero, because it pays no coupons

A zero-coupon bond's only cash flow comes at maturity, so its Macaulay duration equals its maturity. Coupon bonds have durations below maturity. Having no coupons raises, not lowers, duration. Compounding does not extend duration past the single payment date.

An investor holds a 10-year Treasury bought at par with a 2.5% coupon. Yields on comparable Treasuries have risen to 3.5%. The bond will most likely trade:

• a.At a discount to par, because its 2.5% coupon is below the market yield✓
• b.At a premium to par, because the coupon is locked in for the next ten years
• c.At par, because Treasury principal is backed by the full faith of the government
• d.At a premium to par, because yields rose and bond prices follow yields upward

When market yields exceed a bond's coupon, the price drops below par so the buyer's yield reaches the market rate. A fixed coupon below market is a drawback, not a benefit. Government backing assures repayment at maturity but does not hold the market price at par. Price and yield move in opposite directions.

Under the pure expectations theory, a downward-sloping (inverted) yield curve implies that the market expects short-term rates to:

• a.Stay at today's level
• b.Fall in the future✓
• c.Rise in the future
• d.Rise, because long bonds carry a risk premium

In the pure expectations theory, long-term rates are an average of current and expected future short rates, so a long rate below the short rate means short rates are expected to fall. Expecting a rise would give an upward slope. If rates were expected to stay put, the curve would be flat. A risk premium belongs to liquidity preference theory, not pure expectations.

Inflation expectations rise from 2% to 4% while the real interest rate stays unchanged. The nominal rate will:

• a.Rise about 4 percentage points, matching the new inflation rate
• b.Stay unchanged, because the central bank sets nominal rates
• c.Rise about 2 percentage points, keeping the real rate the same✓
• d.Fall, because higher inflation erodes interest income

By the Fisher relationship, nominal rate is about real rate plus expected inflation, so a 2-point rise in expected inflation adds about 2 points. A 4-point rise would take the full inflation level instead of the change. Lenders raise nominal rates, not cut them, to offset inflation. Market nominal rates move with expectations even though the central bank sets its policy rate.

A bond pays a nominal yield of 6.5% while expected inflation is 2.5%. The approximate real yield is:

• a.9.0%
• b.4.0%✓
• c.6.5%
• d.2.6%

Real yield is about nominal yield minus expected inflation: 6.5% - 2.5% = 4.0%. Adding the two rates gives 9.0%. Dividing 6.5 by 2.5 gives 2.6, which is a ratio, not a rate. A real yield of 6.5% would assume zero inflation.

A company has net profit margin of 5%, asset turnover of 1.6 and an equity multiplier of 2.5. Using the DuPont formula, its return on equity is:

• a.20.0%✓
• b.3.2%
• c.8.0%
• d.12.5%

ROE = margin x turnover x equity multiplier = 0.05 x 1.6 x 2.5 = 0.20 or 20%. Margin times turnover alone (8%) is return on assets. Leaving out turnover gives 12.5%. Dividing by the multiplier instead of multiplying gives 3.2%.

A company retains 60% of its earnings and earns a 15% return on equity. Its sustainable growth rate is:

• a.9.0%✓
• b.6.0%
• c.25.0%
• d.15.0%

Sustainable growth = ROE x retention ratio = 15% x 0.60 = 9.0%. Using ROE alone (15%) assumes everything is retained. Using the payout ratio (40%) instead gives 6.0%. Dividing ROE by retention gives 25%, which inverts the relationship.

A technician sees a stock fail repeatedly at $50, then close above it on heavy volume. A technician would most likely view the move as:

• a.A bullish breakout, with the old resistance at $50 now a likely support✓
• b.A neutral result, because volume says nothing about the strength of a price trend
• c.A false signal, because a stock that failed at $50 several times will fail again
• d.A bearish sign, because the stock now trades above its fair value and should fall

A heavy-volume close above resistance suggests demand has overcome supply, and old resistance often becomes support. Technicians read price and volume, not fair value, so the fair-value argument misses the method. A neutral reading ignores that volume is the confirmation that makes a breakout meaningful. A repeat failure is possible, but the signal here is the opposite.

A U.S. investor owns a British stock that gains 5% in pounds. Over the same period the pound falls 8% against the dollar. The investor's return in dollars is about:

• a.A loss of 3.4%✓
• b.A gain of 13.0%
• c.A gain of 5.0%
• d.A loss of 8.0%

Dollar return = 1.05 x 0.92 - 1 = -3.4%. The local gain alone (5%) ignores currency. The currency loss alone (8%) ignores the stock gain. Adding 5% and 8% treats a falling pound as if it helped.

To qualify for pass-through tax treatment, a real estate investment trust must distribute at least what share of its taxable income each year?

• a.50% of its net rental receipts
• b.100% of its total net income, including capital gains
• c.75% of its gross rental receipts
• d.90% of its REIT taxable income✓

A REIT keeps its pass-through status by paying out at least 90% of REIT taxable income (net capital gain is excluded from that base). The 50% and 75% figures do not describe the distribution test; 75% appears only in asset and income tests. Paying out 100% is not required, and the trust can retain net capital gain and pay tax on it.IRC 857(a)(1)

Besides distributing most of its income, a REIT must also have:

• a.Shares that trade on a national securities exchange
• b.At least 100 shareholders at every moment of each taxable year, including its first
• c.Five or fewer individuals who together own more than half of its shares
• d.At least 100 shareholders, for at least 335 days of a 12-month year✓

The Code requires beneficial ownership by 100 or more persons for at least 335 days of a 12-month taxable year, and the requirement does not apply to the first taxable year for which the REIT election is made. It also bars a closely held structure in which a handful of individuals own most of the shares, so a five-owner majority is the reverse of what is required. Exchange listing is common but not required, since non-traded REITs qualify too.IRC 856(a)(5), (a)(6), (b), (h)

A publicly traded master limited partnership avoids corporate-level tax only if at least 90% of its gross income is:

• a.Reinvested in new partnership properties within twelve months of receipt
• b.Qualifying income, such as rents, interest and natural resource income✓
• c.Distributed to unit holders as cash during the same taxable year, with no retention
• d.Earned from active operating businesses located inside the United States

Under Section 7704(c), a publicly traded partnership keeps partnership treatment when 90% of gross income comes from qualifying sources. There is no mandatory cash payout, no U.S.-location test, and no reinvestment requirement in the test.IRC 7704(c)

A unit holder in a master limited partnership receives tax information on:

• a.No form, because distributions are a return of capital
• b.Form 1099-B only, because the units trade on an exchange
• c.Form 1099-DIV, because the MLP pays dividends
• d.Schedule K-1, because the MLP passes income and deductions to its partners✓

An MLP is taxed as a partnership, so each unit holder gets a Schedule K-1 showing a share of income, gains and deductions. Dividend reporting on a 1099-DIV belongs to corporations. A 1099-B reports only sales. Distributions reduce basis but still come with K-1 reporting.

Commercial paper is exempt from Securities Act registration when its maturity at issuance is no more than:

• a.Five years
• b.Thirty days
• c.Nine months (270 days)✓
• d.Twelve months

The exemption in Section 3(a)(3) covers short-term notes with a maturity at issuance not exceeding nine months, which is why paper is issued at 270 days or less. A 30-day limit and a 12-month limit do not match the statute, and a five-year term fits medium-term notes.15 USC 77c(a)(3)

An exchange-traded fund differs from an open-end mutual fund mainly because the ETF:

• a.Is redeemed by the fund only, at the day's closing net asset value
• b.Must hold shares of a single company
• c.Pays no distributions to its shareholders
• d.Trades throughout the day at a price set by the market✓

ETF shares trade on an exchange all day, so the price can sit above or below net asset value. An open-end fund redeems at the end-of-day NAV. ETFs hold diversified baskets, and they pass through dividends and capital gains like other funds.

An investor places an order to buy open-end mutual fund shares at 11:00 a.m. The order will be filled at:

• a.A live price at 11:00 a.m. based on the fund's current holdings
• b.The next NAV calculated once the order has been received✓
• c.The price at which the fund manager's next trade is executed
• d.The previous day's closing NAV, because it is already published

Open-end funds use forward pricing: the order executes at the next NAV computed, which is normally at the close of trading. Using yesterday's NAV would let investors trade on known results. Funds do not price on manager trades or provide intraday quotes.Rule 22c-1

An investor in the 24% federal bracket owns a municipal bond yielding 3.8%, exempt from federal tax. The taxable yield that gives the same after-tax return is:

• a.4.7%
• b.5.0%✓
• c.2.9%
• d.15.8%

Taxable-equivalent yield = 3.8% / (1 - 0.24) = 3.8% / 0.76 = 5.0%. Multiplying by 0.76 gives 2.9%, and dividing by the tax rate alone gives 15.8%. Adding 24% of the yield to it gives 4.7%, which does not gross up for tax correctly.

Treasury Inflation-Protected Securities adjust the principal for changes in the Consumer Price Index. Compared with a conventional Treasury, a TIPS holder in a taxable account:

• a.Owes no federal tax on the adjustment at any time during the holding period
• b.Receives the adjustment as extra cash interest paid every six months
• c.Owes tax on the adjustment only when the bond matures or is sold
• d.Owes tax each year on the inflation adjustment to principal✓

Principal increases on TIPS are taxable in the year they occur, even though the cash arrives only at maturity or sale. They are not tax-free, and they are not deferred to maturity. The adjustment raises principal rather than being paid out with the coupon.

Mortgage pass-through securities issued by Ginnie Mae are backed by:

• a.Only the pool of mortgages, with no government support
• b.The credit of the banks that originated the loans
• c.The Federal Reserve's holdings of agency bonds
• d.The full faith and credit of the U.S. government✓

Ginnie Mae guarantees timely payment of principal and interest, and that guarantee carries the full faith and credit of the United States. Prepayment risk remains, so the cash flows are uncertain even though credit risk is low. The Fed and the originators do not stand behind the pool.

Market yields fall well below the coupon on a callable bond that the investor owns. The risk the holder most faces is that the issuer will:

• a.Redeem the bond early, forcing reinvestment at lower rates✓
• b.Skip the next coupon, because the price is above par
• c.Extend the maturity, because rates are low
• d.Convert the bond into common stock at par

When market yields drop below the coupon, issuers call bonds and refinance more cheaply, leaving holders to reinvest at lower rates. A drop in yields does not signal a missed coupon, and a plain callable bond has no maturity-extension or conversion feature.

A company has cumulative preferred stock outstanding and has skipped its last two dividends. Before it can pay any common dividend, it must:

• a.Issue additional common shares to the preferred holders as compensation
• b.Pay only the current preferred dividend and carry the earlier ones forward
• c.Offer to repurchase the preferred shares from holders at par value
• d.Pay the two missed preferred dividends and the current one✓

Cumulative preferred dividends that are passed accumulate as arrears, and all arrears plus the current dividend come ahead of common. Paying only the current dividend ignores the cumulative feature. A buyback and a share issue are not required.

A U.S. investor buys an American depositary receipt for a foreign company. In addition to the company's business risk, the investor takes on:

• a.No additional risk, since the receipt trades in dollars
• b.Interest rate risk set by the Federal Reserve alone
• c.Default risk of the depositary bank
• d.Currency risk between the home currency and the dollar✓

The ADR is priced in dollars but reflects shares of a company whose value is tied to a foreign currency, so exchange-rate changes affect return. Dollar pricing does not remove that exposure. The depositary holds the shares and does not guarantee them.

An investor buys 100 shares at $50 and sells one call contract at a $55 strike for a $2 premium. The breakeven price and the maximum gain per share are:

• a.Breakeven $57; maximum gain unlimited
• b.Breakeven $48; maximum gain $2
• c.Breakeven $52; maximum gain $5
• d.Breakeven $48; maximum gain $7✓

Breakeven = $50 - $2 = $48. Maximum gain = ($55 - $50) + $2 = $7 per share, reached if the stock is at or above $55. Adding the premium gives a $52 breakeven wrongly. Keeping only the premium ignores the stock gain to the strike. Unlimited gain belongs to an uncovered long position.

An investor buys a put with a $40 strike for a premium of $3. At expiration the stock is at $34. The investor's profit per share is:

• a.A loss of $3
• b.$3✓
• c.$9
• d.$6

Intrinsic value = $40 - $34 = $6, and subtracting the $3 premium leaves a $3 profit. The $6 figure ignores the cost, $9 adds the premium instead of subtracting it, and a $3 loss is the result only if the put expired worthless.

A 45-year-old owner of a nonqualified deferred annuity withdraws some of the account's earnings. In addition to ordinary income tax, the owner generally faces:

• a.A 25% additional tax on the entire withdrawal
• b.A 10% additional tax on the taxable part of the withdrawal✓
• c.A 10% tax on the owner's basis returned
• d.No additional tax, because annuities are insurance products

Earnings withdrawn from an annuity before age 59 1/2 are subject to a 10% additional tax unless an exception applies. The tax applies only to the taxable portion, not the return of basis, and the 25% rate is the RMD penalty, which is unrelated. Insurance status gives no exemption from it.IRC 72(q)

Under the tax rules for a nonqualified annuity contract purchased after 1982, partial withdrawals are treated as coming first from:

• a.Earnings, taxed as ordinary income, and then from basis✓
• b.Whichever source the owner names on the withdrawal request form
• c.Basis, which comes out tax-free, and only then from earnings
• d.Earnings and basis in the same proportion as they sit in the contract

Withdrawals from a nonqualified deferred annuity follow last-in, first-out order, so gains come out first and are taxed as ordinary income; basis comes out afterward without tax. Basis first is the rule for other investments, proportional treatment applies to annuitized payments through an exclusion ratio, and the owner cannot elect the source.IRC 72(e)

If a 529 college savings plan distribution is not used for qualified education expenses, the earnings portion is generally subject to:

• a.Ordinary income tax only, with no further charge
• b.Ordinary income tax and a 10% additional tax✓
• c.Ordinary income tax and a 20% additional tax on the earnings
• d.The 10% additional tax only, with no income tax

Earnings withdrawn for non-qualified purposes are taxed as income to the recipient and carry an additional 10% tax under the rule that treats 529 plans like Coverdell accounts. Neither charge applies alone, and 20% is the rate for nonqualified health savings account withdrawals, not for 529 plans. The owner's age gives no exemption. The contributions themselves come back without tax or penalty.IRC 529(c)(6); IRC 530(d)(4)

A person holds the Series 65 license in good standing and has income below the usual accredited-investor thresholds. For purposes of Regulation D, that person:

• a.Qualifies only while employed at a registered adviser
• b.Qualifies only for offerings sponsored by a broker-dealer
• c.Qualifies as an accredited investor because of the license✓
• d.Does not qualify unless income exceeds $200,000

Under Rule 501(a)(10), the Commission's order of August 2020, effective December 8, 2020, designated the Series 7, Series 65 and Series 82 licenses, held in good standing, as qualifying a natural person as an accredited investor regardless of income or net worth. The income and net worth tests are alternatives to it. Nothing in the order ties the status to the holder's current employer or to the sponsor of the offering.17 CFR 230.501(a)(10); SEC Order, Release No. 33-10823

An investment adviser has custody of client assets. The qualified custodian holding the assets must send account statements to the clients:

• a.At least quarterly✓
• b.Only when the adviser requests it
• c.At least monthly
• d.Once each year with the tax forms

The custody rule requires statements from the qualified custodian at least quarterly, identifying the assets and any transactions. Delivery cannot depend on the adviser, there is no monthly mandate in the rule, and an annual mailing is too infrequent.17 CFR 275.206(4)-2

Besides statements sent to clients, an adviser with custody of client assets generally must also have an independent public accountant:

• a.Approve every trade the adviser places before it is sent to the market
• b.Examine the assets without notice at least once each calendar year✓
• c.Audit the adviser's fee calculations every quarter and report to clients
• d.Certify the adviser's performance figures before each client mailing

The custody rule calls for a surprise examination by an independent public accountant at least once a calendar year, unless an exception applies. The test is verification of assets, not fee audits, performance certification or trade approval.17 CFR 275.206(4)-2

An adviser's books and records generally must be kept for:

• a.Five years from the date on which each record was first created
• b.Five years from the end of the fiscal year of the last entry✓
• c.Seven years, all of them at the adviser's principal office
• d.Three years after the client relationship ends, wherever kept

The record-keeping rule runs five years from the end of the fiscal year in which the last entry was made, and the first two years must be kept in an appropriate office of the adviser. Counting from creation or from the end of the client relationship changes the clock, and seven years is not the requirement.17 CFR 275.204-2(e)(1)