NASAA Series 66 — All Questions

An unregistered financial planner located in one state mails advice about securities to a client in another state, where the client receives it. Under the Act's scope provision, where do the advisory-activity rules apply?

• a.In any state where an act instrumental in effecting the prohibited conduct is done, whether or not either party is there✓
• b.Only in the state where the planner has the principal office
• c.Only in a state where the client has resided for twelve months
• d.Only in the state where the recommended securities are listed

The adviser anti-fraud and registration provisions apply when any act instrumental in effecting prohibited conduct is done in the state, whether or not either party is physically there. This differs from the seller rules, which turn on where offers are made or accepted.Uniform Securities Act (1956) Sec. 414(f)

A dealer in another state mails a written offer to sell securities to a resident of the state. Under the Act, when is an offer to sell made in a state?

• a.Only when the offeror is physically present in the state at the time
• b.Only when the securities are physically delivered into the state
• c.When the offer originates from the state or is directed by the offeror to the state and received there✓
• d.Only when the offeree has lived in the state for at least a year

An offer is made in the state, whether or not either party is present, when it originates from the state or is directed by the offeror to the state and received at the place to which it is directed. Physical delivery of the securities is not required.Uniform Securities Act (1956) Sec. 414(c)

A newspaper of general, regular and paid circulation, published outside the state, carries an advertisement for a securities offering, and some copies reach residents of the state. Is an offer made in the state?

• a.Yes, unless the issuer registers the securities within thirty days after the first copy of the publication reaches a resident of that state
• b.No, because circulating a bona fide out-of-state publication of general, regular and paid circulation is not an offer made in the state✓
• c.No, but only if no resident of the state buys the securities
• d.Yes, because any circulation of the advertisement in the state is an offer there, regardless of whether it is a bona fide publication of general circulation

An offer is not made in the state merely because a bona fide newspaper or publication of general, regular and paid circulation published elsewhere circulates there, or because an out-of-state radio or television program is received there. A publication published in the state also qualifies if more than two-thirds of its circulation was outside the state during the past twelve months.Uniform Securities Act (1956) Sec. 414(e)

What must an applicant for registration under the Uniform Securities Act file along with the application?

• a.A bond equal to the applicant's net worth
• b.A written opinion from outside counsel on the applicant's qualifications
• c.An irrevocable consent appointing the Administrator as attorney to receive service of process in non-criminal actions✓
• d.A sworn waiver of the statute of limitations on civil claims

Every applicant for registration, and every issuer offering securities through an agent, must file an irrevocable consent to service of process naming the Administrator. Service on the Administrator is effective only if notice and a copy are promptly sent by registered mail to the defendant and an affidavit of compliance is filed.Uniform Securities Act (1956) Sec. 414(g)

A stockholder receives a stock dividend and gave nothing of value for it other than the surrender of a right to a cash dividend, and each stockholder could elect cash or stock. Has a sale of a security occurred under the Act?

• a.No, but only if the company paying the dividend is listed on a national exchange
• b.Yes, because every distribution of securities to existing holders is a sale
• c.No, because a qualifying stock dividend is excluded from the definitions of sale and offer✓
• d.Yes, because the stockholder gave up the right to cash, which is value

The definitions of sale and offer exclude bona fide pledges and loans, qualifying stock dividends, acts incident to a class vote on a merger, and acts incident to a judicially approved reorganization. For stock dividends the exclusion applies when stockholders may elect cash or stock and give nothing else of value.Uniform Securities Act (1956) Sec. 401(j)(6)

Under the Act's definition of sale, how is a purported gift of assessable stock treated?

• a.It is considered an offer and sale of a security✓
• b.It is exempt only if the donee is a charitable organization
• c.It is a bona fide gift outside the definition of sale
• d.It is an exempt isolated nonissuer transaction

Sale and offer include every disposition of a security or interest in a security for value, and a purported gift of assessable stock is considered an offer and sale. Likewise, a security given as a bonus with a purchase is part of the subject of the purchase and is considered offered and sold for value.Uniform Securities Act (1956) Sec. 401(j)(4)

A bank issues certificates of deposit to customers and also trades securities for its own account. Is the bank a broker-dealer under the Uniform Securities Act?

• a.Yes, unless the bank's trades are all with other banks
• b.No, but only if the bank has no place of business in the state
• c.No, because the definition of broker-dealer excludes a bank, savings institution or trust company✓
• d.Yes, because trading for its own account in the business of effecting transactions is the core definition

The definition of broker-dealer does not include an agent, an issuer, a bank, savings institution or trust company, or certain persons with no place of business in the state who deal only with specified institutions or existing out-of-state customers.Uniform Securities Act (1956) Sec. 401(c)

A customer places an unsolicited order to buy a nonexempt security through a registered broker-dealer in a nonissuer transaction. Which exemption from registration most directly applies?

• a.The exemption for offers to existing holders with a standby commission
• b.The exemption for preorganization certificates with ten subscribers
• c.The exemption for nonissuer transactions effected through a registered broker-dealer on an unsolicited order✓
• d.The exemption for isolated transactions by the issuer itself

The Act exempts any nonissuer transaction effected by or through a registered broker-dealer on an unsolicited order or offer to buy. The Administrator may require the customer to acknowledge in writing that the order was unsolicited, and the firm must keep the signed form.Uniform Securities Act (1956) Sec. 402(b)(3)

A person is convicted of willfully violating the Uniform Securities Act. Under the model Act, what is the maximum penalty?

• a.Imprisonment of up to one year with no fine allowed
• b.A fine of up to $10,000 and imprisonment of up to five years
• c.A fine of up to $5,000 with no possibility of imprisonment
• d.A fine of up to $5,000, imprisonment of up to three years, or both✓

A willful violation of the Act or of a rule or order is punishable on conviction by a fine of up to $5,000, imprisonment up to three years, or both. A person cannot be imprisoned for violating a rule or order if he proves he had no knowledge of it. States set their own penalties, often higher.Uniform Securities Act (1956) Sec. 409(a)

An issuer files a notice with the Administrator specifying the terms of an offer to its existing security holders, and pays no commission for soliciting them. How long must the issuer wait before relying on the exemption if the Administrator takes no action?

• a.Until the Administrator issues an order granting the exemption, which may take whatever time the review requires
• b.Thirty calendar days from the date of the notice, after which the exemption becomes effective unless an order disallows it
• c.Ten calendar days from the date of the notice, after which the exemption stands unless an order disallows it
• d.Five full business days, after which the exemption stands unless an order disallows it✓

The exemption for offers to existing security holders is available if no commission is paid for soliciting holders in the state, or if the issuer first files a notice of the terms and the Administrator does not disallow the exemption by order within the next five full business days. No affirmative grant is required.Uniform Securities Act (1956) Sec. 402(b)(11)

On Wednesday, October 28, 2026, an investor acquires enough shares to own 6% of a class of a company's registered equity securities, with no exemption available. Assuming no federal holidays fall in the period, by what date must the initial Schedule 13D be filed?

• a.Wednesday, November 4, because five business days run from the day after the acquisition✓
• b.Tuesday, November 3, because the acquisition date counts as the first business day
• c.Monday, November 2, because five calendar days run from the acquisition
• d.Monday, November 9, because ten calendar days run from the acquisition

A person who becomes the beneficial owner of more than five percent of a class of registered equity securities must file a Schedule 13D within five business days after the date of acquisition. The count starts the day after the acquisition: Thursday, Friday, Monday, Tuesday and Wednesday. The calendar-day counts reflect the older, longer deadline structures and do not apply to this filing.17 CFR 240.13d-1(a)

A mutual fund board adopts a redemption fee under Rule 22c-2 to deter short-term trading. Which statement describes the limits the rule places on that fee?

• a.The fee may not exceed five percent of the value of the shares redeemed and may apply to redemptions within a period of no less than thirty calendar days
• b.The fee may not exceed two percent of the value of the shares redeemed and may apply to redemptions within a period of no less than seven calendar days✓
• c.The fee has no percentage ceiling but may be charged only on shares redeemed within seven calendar days of purchase
• d.The fee may not exceed one percent of the value of the shares redeemed and may apply only to redemptions within the first ninety days

Rule 22c-2 lets a fund board approve a redemption fee of no more than two percent of the amount redeemed, applied to shares redeemed within a time period the board chooses, which can be no shorter than seven calendar days. The ceiling matters: a fee that is uncapped or above two percent is outside the rule, and so is a window that is shorter than seven days.17 CFR 270.22c-2(a)(1)(i)

An exchange-traded fund relies on Rule 6c-11 rather than an individual exemptive order. Which disclosure must it make on its website?

• a.Each business day, before regular trading opens, the portfolio holdings that will form the basis of its next net asset value calculation✓
• b.Its portfolio holdings only to authorized participants, who must keep them confidential
• c.Its complete portfolio holdings, updated once per quarter with a sixty-day lag, because daily holdings are disclosed only to authorized participants
• d.A monthly list of its ten largest positions, published within five business days of month end, together with a quarterly list of all other holdings

The ETF rule conditions relief on daily transparency. Every business day, before the primary listing exchange opens, the fund must post on a public, free website the holdings that will go into the next NAV calculation, along with the NAV, market price and premium or discount information for the prior day. Quarterly lagged disclosure applies to other fund reports, and limiting holdings to authorized participants is the model older, non-transparent structures used.17 CFR 270.6c-11(c)(1)

A registered investment adviser, subject to Regulation S-P, signs a new individual client on March 3 and opens an account for that client. As a general rule, when must the initial privacy notice be given?

• a.Within thirty days after March 3
• b.Only before the adviser first decides to share the client's information with a nonaffiliated company
• c.With the first quarterly account statement after March 3
• d.No later than March 3, when the customer relationship is established✓

An individual who becomes a customer must receive a clear and conspicuous initial privacy notice not later than when the customer relationship is established. That is a rule for customers. A consumer who is not a customer need only receive the notice before the firm discloses nonpublic personal information to a nonaffiliated third party, which is the timing the last wrong answer borrows.17 CFR 248.4(a)

Under Regulation S-P as amended, a covered institution learns that an unauthorized person likely gained access to sensitive customer information, and no substantial-harm exception applies. How quickly must it notify the affected individuals?

• a.As soon as practicable, but not later than 30 days after becoming aware of the incident✓
• b.Within 72 hours after becoming aware of the incident
• c.Within 10 business days after the incident, with a 60-day extension available for any reason
• d.Within 90 days after the close of the quarter in which the incident occurred

The incident response rule requires the institution to give affected individuals a clear and conspicuous notice as soon as practicable and no later than 30 days after becoming aware that unauthorized access or use occurred or is reasonably likely to have occurred. Only the United States Attorney General can authorize a delay, and then only for national security or public safety reasons, so a firm cannot extend the period on its own.17 CFR 248.30(a)(4)(iii)

A client of an investment adviser receives the firm's initial privacy notice and opt-out notice but has not responded. The adviser wants to give the client's nonpublic personal information to a nonaffiliated marketing company, and no exception applies. What must happen before the adviser may do so?

• a.The marketing company must register as an investment adviser representative
• b.The adviser must give the client a reasonable opportunity to opt out, and the client must not have opted out✓
• c.The client must sign an affirmative written consent to the disclosure before any nonaffiliated third party may receive the information
• d.Nothing further, because the notices alone authorize the disclosure

Regulation S-P is an opt-out regime for ordinary sharing with nonaffiliated third parties. The firm may disclose only after giving the initial notice and the opt-out notice, allowing a reasonable time to opt out, and confirming that the consumer has not done so. Written consent is not required, but notices without a waiting period are not enough either.17 CFR 248.10(a)(1)

A mutual fund's name includes the words "Municipal Income." Under the fund names rule, what policy must the fund adopt to use a name suggesting income exempt from federal income tax?

• a.Under normal circumstances, at least 80% of the value of its assets must be invested in investments whose income is exempt from federal tax✓
• b.Under normal circumstances, at least 65% of its assets must be invested in tax-exempt municipal securities issued within the fund's home state
• c.At least 51% of its net income must come from municipal securities in each quarter, and at least 80% of that income must be earned within one state
• d.At least 80% of its shareholders must be residents of the state of the issuers whose bonds it holds

The names rule requires a fund whose name suggests a focus on a type of investment, including tax-exempt income, to adopt a policy of investing at least 80% of the value of its assets in line with that focus under normal circumstances. The test is measured on assets or distributed income, never on who the shareholders are, and the percentage is not lower than 80.17 CFR 270.35d-1(a)

A fund subject to the names rule has adopted an 80% investment policy tied to its name and now wants to change that policy without making it a fundamental policy. What does the rule require?

• a.Approval by a majority of the outstanding voting shares before the change
• b.Written consent from each shareholder who purchased shares in the past year
• c.A filing with the Commission that must be reviewed and cleared before the change
• d.At least 60 days' prior notice to shareholders of the change in the policy✓

A fund that does not treat its 80% policy as fundamental, which would require a shareholder vote to change, must give shareholders at least 60 days' prior notice before changing it, and the notice must meet the rule's content requirements. A vote is the route for a fundamental policy, not the notice alternative.17 CFR 270.35d-1(a)(2)(ii)

A registered open-end mutual fund has $90 million in total assets and no liabilities. It wants to borrow from a bank. Applying the 300% asset coverage requirement of the Investment Company Act, what is the largest amount it may borrow, counting the loan proceeds as assets?

• a.$30 million
• b.$45 million✓
• c.$60 million
• d.$90 million

Asset coverage is total assets, less liabilities not represented by senior securities, divided by the borrowings, and it must be at least 300% immediately after the borrowing. With a loan of B, assets become 90 plus B, and (90 + B) / B must be at least 3, so B can be at most 45. Dividing the original $90 million by three gives $30 million, which ignores that the loan proceeds are themselves assets.Investment Company Act of 1940 Sec. 18(f)(1) (15 U.S.C. 80a-18(f)(1))

A registered open-end fund has borrowed from a bank, and a market decline pushes its asset coverage below 300%. What does the Investment Company Act require?

• a.The fund must reduce its borrowings within three days, not counting Sundays and holidays, to restore the required coverage✓
• b.The fund must repay the entire loan on the same business day on which coverage fell
• c.The fund must reduce its borrowings within thirty calendar days to restore the required coverage and may not borrow again until the next quarter
• d.The fund may leave the borrowings in place until the next quarterly valuation date, provided it notifies its board of directors in writing

Section 18(f) allows an open-end company to borrow only if asset coverage is at least 300% immediately after the borrowing. If coverage later falls below that level, the company has three days, excluding Sundays and holidays, to reduce borrowings enough to restore it. The statute provides neither a thirty-day grace period nor a requirement to retire the whole loan.Investment Company Act of 1940 Sec. 18(f)(1) (15 U.S.C. 80a-18(f)(1))

Before an investment adviser's access person may buy securities in an initial public offering or a limited offering, what does Rule 204A-1 require the firm's code of ethics to provide?

• a.The access person may buy freely if the position stays below five percent of the offering
• b.The access person must report the purchase on the next quarterly transaction report and need not seek approval
• c.The access person must wait thirty days after the offering before buying
• d.The access person must first obtain the adviser's approval✓

The code of ethics must require access persons to get the adviser's approval before directly or indirectly acquiring beneficial ownership in any security in an IPO or limited offering. After-the-fact quarterly reporting is a separate duty and does not replace the pre-clearance, and the rule sets no percentage safe harbor.17 CFR 275.204A-1(c)

A broker-dealer approves a customer's account for penny stock transactions and sends the customer the written agreement to the transaction. Under Rule 15g-9, how long must the broker-dealer wait before effecting the customer's first penny stock purchase?

• a.At least two business days after sending the agreement✓
• b.At least five business days after the account opens
• c.At least one business day after receiving the signed agreement
• d.No waiting period, if the customer has traded penny stocks before at another firm

Rule 15g-9 bars the firm from selling a penny stock to, or buying one for, a customer less than two business days after it sends the written agreement to the transaction, and requires the suitability determination and the customer's written agreement to be in hand. The waiting period is measured from the date the firm sends the document, not from when the customer returns it.17 CFR 240.15g-9(a)

Under SEC Rule 17a-4, for how long must a broker-dealer preserve account cards or records relating to the terms and conditions of a customer's account?

• a.At least three years after the account is opened
• b.At least six years after the account is closed✓
• c.For the life of the enterprise
• d.At least three years after the account is closed, the first two in an easily accessible place

Account cards and records on the terms of opening and maintaining an account must be kept at least six years after the closing of the account. The three-year, two-years-accessible schedule applies to many other required records, while only a narrow set, such as the firm's own organizational documents, is kept for the life of the enterprise.17 CFR 240.17a-4(c)

A founder buys newly issued shares of a qualifying small C corporation in 2026 and sells them after holding them for exactly four years. Under current Section 1202, what percentage of the eligible gain may be excluded?

• a.0%, because the stock must be held more than five years
• b.50%
• c.75%✓
• d.100%

For qualified small business stock acquired after the 2025 amendment, the exclusion is tiered: 50% of eligible gain after three years, 75% after four and 100% after five or more. The old all-or-nothing test of more than five years applies only to stock acquired on or before the applicable date, so a four-year holder of newer stock is not shut out.IRC Sec. 1202(a)(1)(B) and (a)(6)

Under current Section 1202, what is the maximum amount of aggregate gross assets a C corporation may have, before and immediately after the stock issuance, for its stock to be qualified small business stock?

• a.$10 million
• b.$25 million
• c.$50 million
• d.$75 million✓

A qualified small business must be a domestic C corporation whose aggregate gross assets never exceeded $75 million before the issuance and do not exceed that amount immediately afterward. Earlier law used a $50 million ceiling, and the $10 million figure is the old per-issuer gain cap, a different limit.IRC Sec. 1202(d)(1)

A taxpayer closes on the sale of a rental building on March 1, 2026 as the relinquished property in a like-kind exchange, using a qualified intermediary. Assuming the tax return due date does not shorten the period, what are the deadlines to identify and to receive the replacement property?

• a.Identify by March 31, 2026 and receive by May 30, 2026
• b.Identify by April 15, 2026 and receive by August 28, 2026✓
• c.Identify by April 15, 2026 and receive by December 31, 2026
• d.Identify by April 30, 2026 and receive by September 30, 2026

The replacement property must be identified within 45 days and received by the earlier of 180 days or the due date of the return for the year of transfer. Forty-five days after March 1 is April 15, and 180 days after March 1 is August 28. The end-of-year date confuses this with a calendar-year convention that the statute does not use.IRC Sec. 1031(a)(3)

After 2017, which of the following exchanges can qualify for nonrecognition treatment under Section 1031?

• a.One mutual fund exchanged for a similar mutual fund
• b.A rental house traded for farmland, both held for investment✓
• c.A family's principal residence traded for a vacation cottage used only by the family
• d.A delivery truck used in a business traded for a newer truck

Section 1031 now covers only exchanges of real property held for productive use in a trade or business or for investment, for real property of like kind. Equipment and securities are no longer eligible, and property held for personal use, including a vacation home used only by the owner, was never within the rule.IRC Sec. 1031(a)(1)

An heir inherits stock on March 1 and sells it on June 1 of the same year for more than its value at the decedent's date of death. How is the gain classified?

• a.Long-term, because inherited property sold within one year of death is treated as held for more than one year✓
• b.Short-term, unless the decedent held the stock for more than one year
• c.Short-term, because the heir held the stock for only three months
• d.Not taxable, because the heir's basis was stepped up to the sale price

When an heir's basis is determined by the date-of-death rule and the property is sold within one year after the decedent's death, the heir is deemed to have held it for more than one year. The holding period is therefore long-term regardless of how brief the heir's own ownership was. The step-up applies to the value at death, so appreciation after death is still taxable.IRC Sec. 1223(9)

Which describes the statutory limits on a charitable remainder trust?

• a.The annual payout is fixed by statute at 7%, and the charity's remainder interest must be worth at least 20% at funding
• b.The annual payout must be between 5% and 50%, and the charity's remainder interest must be worth at least 10% at funding✓
• c.The annual payout must be at least 10%, and the charity's remainder may be of any value
• d.The annual payout must be between 2% and 20%, and the charity's remainder interest must be worth at least 5% at funding

A charitable remainder trust must pay at least 5% and no more than 50% of the initial value (annuity trust) or annually revalued value (unitrust) to a noncharitable beneficiary at least annually. The present value of the charity's remainder must also be at least 10% of the property's value when contributed. Both limits are required, and the payout is chosen within the range by the grantor.IRC Sec. 664(d)(1)(A), (d)(1)(D), (d)(2)(A), (d)(2)(D)

An employee is granted incentive stock options this year on shares with a fair market value of $140,000 at the grant date, and all of the options first become exercisable this year. No other options are outstanding. How are the options treated?

• a.All of the options are incentive stock options, because they were granted as such
• b.Options on $100,000 of stock are incentive stock options, and options on the remaining $40,000 are treated as nonqualified options✓
• c.Options on $70,000 of stock are incentive stock options, with the remaining $70,000 split evenly between nonqualified and phantom treatment
• d.None of the options are incentive stock options, because the plan exceeded the limit

Incentive stock options are limited to $100,000 of stock, measured by fair market value at grant, that first becomes exercisable in any calendar year. The excess is treated as nonqualified options, applying the options in the order granted. The plan does not lose its status entirely, and no 'phantom' treatment exists in the statute.IRC Sec. 422(d)

An employee who owns 12% of the voting power of the employer is granted an incentive stock option when the stock's fair market value is $20.00 per share. To qualify as an incentive stock option, what must be true?

• a.The exercise price must be at least $20.00 and the option must expire within five years of grant
• b.The exercise price must be at least $20.00 and the option must expire within ten years of grant
• c.The exercise price must be at least $22.00 and the option must expire within five years of grant✓
• d.The exercise price must be at least $22.00 and the option must expire within ten years of grant

For an employee owning more than 10% of the voting power, an incentive stock option must have an exercise price of at least 110% of fair market value at grant and cannot be exercisable after five years. The ordinary ISO term is ten years and the ordinary price floor is 100% of grant-date value, so each wrong choice mixes one ordinary condition with one ten-percent-owner condition.IRC Sec. 422(c)(5)

An investor sells 100 shares for $30 per share, realizing a loss because the shares cost $50 per share. Ten days later the investor buys 100 substantially identical shares for $28 per share. What is the tax basis of the new shares?

• a.$5,000
• b.$3,000
• c.$2,800
• d.$4,800✓

The loss of $2,000 is disallowed as a wash sale, and the basis of the replacement shares is the old basis adjusted by the difference in prices. Old basis of $5,000, plus the $2,800 paid, minus the $3,000 received, equals $4,800, which is the $2,800 cost plus the $2,000 deferred loss. Using only the purchase price would permanently lose the deferred loss.IRC Sec. 1091(a) and (d)

A client invests $600 on the first day of each of three consecutive months into the same fund at prices of $20, $15 and $12 per share. What is the client's average cost per share?

• a.$15.00✓
• b.$15.67
• c.$16.00
• d.$12.00

The client buys 30, 40 and 50 shares, 120 shares for $1,800, so the average cost is $15.00. The simple average of the three prices is $15.67, but that overstates cost because a fixed dollar amount buys more shares when the price is low, which is the arithmetic advantage of dollar-cost averaging.NASAA Series 66 Content Outline, Topic III (portfolio management techniques: dollar-cost averaging)

A portfolio's long-term policy allocation is 60% stocks and 40% bonds. A manager temporarily raises stocks to 70% because short-term valuations appear attractive, with a plan to return to 60% afterward. This is an example of:

• a.Strategic asset allocation
• b.Dollar-cost averaging
• c.Tactical asset allocation✓
• d.Rebalancing to the policy target

Tactical asset allocation deliberately and temporarily departs from the policy mix to exploit perceived short-term opportunities. The 60/40 policy itself is the strategic allocation, rebalancing would move the portfolio back toward it, and dollar-cost averaging concerns investing equal dollar amounts over time.NASAA Series 66 Content Outline, Topic III (strategic vs. tactical asset allocation)

At the start of an economic recovery, an adviser shifts a portion of a client's portfolio from utilities and consumer staples into industrials and consumer discretionary stocks, expecting the latter groups to lead. This technique is best described as:

• a.Sector rotation✓
• b.Immunization
• c.Constant-ratio rebalancing
• d.Tax-loss harvesting

Sector rotation moves capital among industry groups in anticipation of the business cycle, favoring cyclical sectors early in an expansion and defensive ones late in it. Immunization matches bond duration to a liability, constant-ratio rebalancing restores fixed weights, and harvesting is about realizing losses for tax purposes.NASAA Series 66 Content Outline, Topic III (portfolio techniques: sector rotation)

A retirement analysis using Monte Carlo simulation reports an 85% probability of success for a client's withdrawal plan. What does that figure represent?

• a.In 85% of the simulated return sequences, the portfolio lasted through the planning horizon✓
• b.The client has an 85% chance of outliving the portfolio's guaranteed income
• c.The portfolio is expected to earn 85% of its target return each year
• d.85% of the portfolio will remain after the planning horizon ends

A Monte Carlo simulation runs many randomized return paths and counts the share in which the plan's goal is met. A success rate is a probability across scenarios, not a forecast of return, a portion of assets left over, or a guarantee. A plan with 85% success still fails in about one path in seven.NASAA Series 66 Content Outline, Topic III (retirement planning analysis)

A client who owns an IRA pledges the account as security for a personal loan. How does the Internal Revenue Code treat the pledge?

• a.Nothing is treated as distributed unless the lender actually seizes the assets
• b.The entire IRA loses its tax-exempt status as of the first day of the year
• c.The pledge is permitted if the loan is repaid within 60 days
• d.The portion of the account pledged is treated as distributed to the owner✓

Using an IRA, or any part of it, as security for a loan causes the pledged portion to be treated as distributed to the owner, which is taxable and may carry the early-distribution penalty. Disqualification of the whole account is the result of a prohibited transaction under Section 4975 instead, which is a different rule. The 60-day rule belongs to rollovers.IRC Sec. 408(e)(4)

An IRA owner engages in a transaction prohibited by Section 4975 with respect to their own IRA. What is the consequence for the account?

• a.The account ceases to be an IRA on the first day of the following year
• b.The account becomes a Roth IRA automatically
• c.The account ceases to be an IRA as of the first day of that taxable year✓
• d.Only the amount involved in the transaction is taxed, and the IRA continues

For an IRA owner or beneficiary who engages in a prohibited transaction with the account, the whole account stops being an IRA as of the first day of the taxable year in which it happened. That treatment is harsher than the partial treatment applied when only a pledge is made, and there is no automatic conversion to a Roth.IRC Sec. 408(e)(2)

An IRA buys a set of antique rugs and a stamp collection for a total of $30,000. How does the Internal Revenue Code treat the purchase?

• a.As a nontaxable rollover into a collectibles account
• b.As a distribution to the owner in the amount of the cost, $30,000✓
• c.As a permitted investment, because antiques and stamps are tangible assets
• d.As a prohibited transaction that disqualifies the IRA only if the coins are held at home

The acquisition of a collectible by an IRA is treated as a distribution equal to its cost. Collectibles include artwork, rugs, antiques, metals, gems, stamps, coins and alcoholic beverages. The location of storage does not change the rule, and no rollover treatment applies. Only specified coins and bullion held by a trustee are excepted by the statute, and rugs and stamps are not among them.IRC Sec. 408(m)(1) and (2)

A single taxpayer sold a principal residence two years ago and excluded the gain. The taxpayer now sells a different principal residence owned and used for four years, with a $180,000 gain. Under Section 121, what is the result?

• a.The full $180,000 is excluded, because the limit is $250,000
• b.The full $180,000 is excluded, because only a home owned fewer than two years is limited
• c.The exclusion is unavailable, because another sale used it within the last two years✓
• d.$125,000 is excluded, which is half the single filer's limit

The exclusion does not apply when another sale to which it applied occurred within the two years ending on the sale date. Ownership and use of four years satisfy the two-of-five test, and $180,000 is under the $250,000 cap, but the once-every-two-years rule overrides both. A partial exclusion applies only in limited circumstances such as a qualifying move.IRC Sec. 121(b)(3)

A plan sponsor wants a default investment fund to receive fiduciary relief under the Department of Labor's qualified default investment alternative rule. When must participants receive the initial notice?

• a.At least 90 days before plan eligibility, with no further notice required
• b.On or after the first investment in the fund, with notice repeated every three years and no requirement that it precede the participant's eligibility
• c.Within 60 days after the first investment, and only if the participant asks
• d.At least 30 days before plan eligibility or before the first investment in the fund, with annual notice at least 30 days before each plan year✓

The QDIA rule requires a notice at least 30 days before eligibility or the first default investment, or on the eligibility date if the participant can take a penalty-free withdrawal, and a further notice at least 30 days before each later plan year. After-the-fact or on-request notices do not satisfy it, and the rule has no 90-day lead time.29 CFR 2550.404c-5(c)(3)

A 529 plan account has been maintained for the beneficiary for more than 15 years. What is the lifetime limit on rollovers from the account to the beneficiary's Roth IRA?

• a.$10,000
• b.$100,000
• c.$35,000✓
• d.$7,000

The 529-to-Roth rollover is available for an account maintained for 15 years, limited to the amount contributed more than five years earlier, subject to the annual IRA contribution limit, and capped at $35,000 over the beneficiary's lifetime. The lower figures are annual-limit-type amounts, and $100,000 is not a statutory figure for this rollover.IRC Sec. 529(c)(3)(E)

A donor gives cash to a public charity in a year, and separately gives long-term appreciated stock to the same charity. Which statement about the deduction limits under Section 170(b) is correct?

• a.Cash gifts are generally limited to 60% of the donor's contribution base, and gifts of appreciated capital gain property to 30%, with excess carried forward five years✓
• b.Both are limited to 50% of adjusted gross income, any excess is lost permanently, and appreciated stock is deductible only at the donor's cost basis rather than market value
• c.Cash is limited to 30% and appreciated stock to 60% of contribution base
• d.There is no limit on either as long as the charity is a public charity

Cash contributions to public charities are allowed up to 60 percent of the contribution base, while gifts of capital gain property are generally capped at 30 percent. Excess amounts carry forward for five succeeding years rather than expiring, and the two caps are not reversed.IRC Sec. 170(b)(1)(C) and (G)

A domestic private foundation that is not an operating foundation must, to avoid a tax on undistributed income, generally distribute each year an amount based on what percentage of its non-charitable-use assets?

• a.2%
• b.10%
• c.1.39%
• d.5%✓

The minimum investment return, from which the distributable amount is built, is 5 percent of the net fair market value of assets not used directly for exempt purposes. The 1.39 percent figure is the excise tax on net investment income, a different item.IRC Sec. 4942(e) and (d)

What is the federal excise tax rate on the net investment income of a domestic tax-exempt private foundation?

• a.0%, because foundations are tax-exempt
• b.2%
• c.1.39%✓
• d.5%

Since 2019 the single rate is 1.39 percent of net investment income. The earlier 2 percent rate and its reduction for higher payouts were repealed, and tax-exempt status does not remove this excise tax.IRC Sec. 4940(a)

To qualify as a regulated investment company, a mutual fund must derive at least what portion of its gross income from dividends, interest, securities loan payments and gains from the sale of securities or currencies?

• a.50%
• b.80%
• c.75%
• d.90%✓

The income test for a regulated investment company requires at least 90 percent of gross income from passive securities-type sources. The 75 percent figure belongs to the REIT income test, a different pass-through vehicle, and 50 percent is the quarterly asset-diversification threshold rather than an income test.IRC Sec. 851(b)(2)

Which condition is part of the quarterly asset test a fund must meet to keep its status as a regulated investment company?

• a.At least 50% of total assets must be in cash, government securities, other funds, and holdings of any one issuer capped at 5% of fund assets and 10% of that issuer's voting securities✓
• b.No more than 5% of total assets may be invested in the securities of other investment companies
• c.At least 90% of total assets must be held in securities issued by domestic corporations
• d.At least 75% of total assets must be in real estate assets, cash and government securities

The tax-status diversification test looks at the close of each quarter and counts at least half of assets that are cash-like, government or fund holdings, or other securities limited per issuer to 5 percent of fund assets and 10 percent of voting stock. The real-estate version is the REIT asset test, and the tax test contains no domestic-issuer requirement.IRC Sec. 851(b)(3)

A fund wants to avoid corporate-level tax on the income it passes through to shareholders. To be taxed as a regulated investment company, it must distribute at least what percentage of its investment company taxable income?

• a.90%✓
• b.80%
• c.100% of capital gains but no minimum of ordinary income
• d.70%

The distribution requirement is at least 90 percent of investment company taxable income, plus 90 percent of net tax-exempt interest. Undistributed amounts are taxed at the fund level. There is no rule that merely requires capital gains to be distributed while ordinary income is left in the fund.IRC Sec. 852(a)(1)

Under the Investment Company Act of 1940, which test must a management company meet to be classified as diversified?

• a.At least 90% of total assets in securities of issuers carrying an investment-grade rating from at least one nationally recognized rating organization on the date of purchase
• b.At least 50% of total assets in securities of no fewer than ten different industries, with no more than 10% in any one industry group at the end of every quarter
• c.At least 75% of total assets in cash, government securities, other funds and securities limited to 5% of assets and 10% of the issuer's voting stock per issuer✓
• d.No more than 25% of total assets may be in any one sector, the fund must hold at least 100 separate positions, and no position may exceed 10% of net assets at quarter end

The 75-5-10 test classifies a management company as diversified when three quarters of its assets are spread so that no one issuer exceeds 5 percent of assets or 10 percent of its voting securities. The statute has no industry-count, sector-cap or credit-rating requirement, and the tax-status test on the 50 percent threshold is a different test.ICA Sec. 5(b)(1) [15 U.S.C. 80a-5(b)(1)]

A corporation wants to qualify as a real estate investment trust. Which ownership requirement applies?

• a.It must have at least 500 shareholders of record, all of them accredited investors
• b.It must be owned by fewer than 100 persons so that it avoids registration
• c.Its shares must be beneficially owned by 100 or more persons, and it must not be closely held✓
• d.No single shareholder may own more than 5% of its shares at any time

A REIT must have at least 100 beneficial owners and must not be closely held, meaning five or fewer individuals may not own more than half of the value in the second half of the year. There is no 500-holder or accredited-investor rule, and a single holder may own more than 5 percent.IRC Sec. 856(a)(5)-(6)