NASAA Series 66 — All Questions

An open-end investment company's total assets are $520 million, its liabilities are $20 million, and it has 10 million shares outstanding. What is the net asset value per share?

• a.$50.00✓
• b.$52.00
• c.$2.00
• d.$500.00

NAV per share = (assets - liabilities) / shares outstanding = $500M / 10M = $50. Using assets alone gives $52, which ignores what the fund owes. Dividing the liabilities by shares gives $2. Treating the $500 million of net assets as a per-share figure gives $500 and ignores the share count.

Under the Investment Company Act of 1940, an open-end fund that receives a valid redemption request must generally pay the redemption proceeds within:

• a.Seven days✓
• b.Three days
• c.Thirty days
• d.Ninety days

Section 22(e) prohibits suspending redemption rights or delaying payment more than seven days after the tender, apart from limited exceptions such as market closures or SEC orders. Shorter and longer periods do not match the statutory limit.Investment Company Act Section 22(e)

Which statement about a closed-end fund is accurate?

• a.Its shares are redeemed by the fund at net asset value whenever a holder asks
• b.Its portfolio manager must sell holdings whenever shareholders sell shares
• c.Its shares are continuously offered to the public at the net asset value
• d.Its shares trade in the secondary market at a premium or discount to NAV✓

A closed-end fund issues a fixed number of shares through an offering, after which they trade like stocks and can sit above or below NAV. Redemption on demand and continuous offering describe open-end funds. Because investors trade with each other, manager sales are not forced by shareholder selling.

Under FINRA rules, a mutual fund that pays for distribution through 12b-1 fees can describe itself as 'no-load' only if its 12b-1 and service fees total no more than:

• a.0.25% of average net assets annually✓
• b.1.00% of average net assets annually
• c.0.75% of average net assets annually
• d.2.50% of average net assets annually

FINRA Rule 2341 allows a fund to call itself no-load only if it has no front-end or deferred sales charge and its 12b-1 fees do not exceed 0.25% of average net assets. The 1.00% figure is the overall cap on asset-based sales charges plus service fees, and 0.75% is the cap on the sales charge portion. A 2.50% figure has no basis in the rule.

A client invests in a variable annuity during the accumulation phase. Which statement is correct?

• a.The insurer holds the premiums in its general account at a fixed rate
• b.The owner bears the investment risk, and values follow subaccount performance✓
• c.The insurer bears the investment risk and guarantees a fixed rate of return
• d.The contract owner is guaranteed at least the premiums paid in cash

In a variable annuity, premiums go to separate-account subaccounts and the owner takes the investment risk. A guaranteed rate describes a fixed annuity. Principal is not guaranteed on surrender. Premiums credited fixed interest from the general account describe a fixed product. Death benefits may offer minimums, but not a surrender guarantee.

A 45-year-old withdraws money from a nonqualified deferred annuity before annuitizing. What is the usual federal tax treatment of the withdrawal?

• a.The amount is tax-free because annuities grow on a tax-deferred basis
• b.The entire amount is taxed as a long-term capital gain at the lower rate
• c.Earnings come out first as ordinary income, plus a 10% additional tax before 59 1/2✓
• d.Principal comes out first and is tax-free, with the earnings taxed later

Nonqualified annuity withdrawals are taxed on a last-in, first-out basis: earnings first, as ordinary income, and the 10% additional tax applies before 59 1/2. First-in, first-out is the opposite order. Annuity gains are not capital gains. Tax-deferred is not tax-free.

A retiree annuitizes a nonqualified annuity. The investment in the contract is $100,000, and the expected return, meaning the total of all payments expected over the payout period, is $200,000. If monthly payments are $1,000, how much of each payment is excludable from income?

• a.$100, because only 10% of each payment is a return of cost
• b.$333, because the exclusion ratio is $100,000 / $300,000
• c.$1,000, because the investment in the contract is tax-free
• d.$500, because the exclusion ratio is 50% ($100,000 / $200,000)✓

The exclusion ratio = investment in the contract / expected return = $100,000 / $200,000 = 50%, so $500 of each $1,000 payment is a tax-free return of capital. Dividing by $300,000 adds the investment to an expected return that already includes it. A 10% ratio has no basis in these figures, and treating the whole payment as tax-free ignores that the growth portion is taxable. Once the full investment has been recovered, later payments are fully taxable.26 U.S.C. §72(b)(1)

An investor buys one XYZ 50 call at a premium of $3. At expiration, what is the breakeven stock price?

• a.$47
• b.$53✓
• c.$56
• d.$50

A call buyer breaks even when the stock equals strike plus premium: $50 + $3 = $53. Subtracting the premium gives $47, which is the put buyer's breakeven. The strike alone is only the point where the option starts to have intrinsic value. $56 doubles the premium.

An investor sells one ABC 40 put at a premium of $2 per share. What is the investor's maximum possible loss?

• a.$4,000
• b.$200
• c.Unlimited
• d.$3,800✓

The put seller can lose at most the strike less the premium if the stock falls to zero: ($40 - $2) x 100 = $3,800. $200 is the maximum gain. $4,000 ignores the premium received. Unlimited loss applies to an uncovered call, because a stock price has no upper limit.

An investor owns 100 shares of DEF bought at $48 and writes one DEF 50 call for a $2 premium. What is the maximum gain if the call is exercised?

• a.$600
• b.Unlimited
• c.$400✓
• d.$200

If the stock is called away at $50, the investor gains $2 on the shares plus the $2 premium: $4 x 100 = $400. The premium alone is $200. $600 double counts the premium. The upside is capped by the strike, so gains cannot be unlimited.

An investor buys 100 shares of GHI at $60 and also buys one GHI 55 put for $3. What is the breakeven price on the position?

• a.$55
• b.$57
• c.$52
• d.$63✓

The put premium raises the cost of the position to $63 per share, so the stock must reach $63 to break even. Subtracting the premium to get $57 lowers the cost instead of adding to it. The $55 strike is only the price at which the put starts to pay, and $52 subtracts the premium from the strike, ignoring what was paid for the stock.

An investor buys a call and a put on the same stock with the same strike price and expiration. This long straddle is most profitable when:

• a.The stock moves far enough either way to cover both premiums✓
• b.The stock stays near the strike price right up until expiration
• c.The stock drifts slightly lower while implied volatility declines
• d.The stock rises steadily, but by less than the combined premiums

A long straddle pays off when the price move exceeds the combined premiums, in either direction. Staying near the strike is the best case for the seller. A small move in either direction fails to cover cost. Falling volatility reduces option values, hurting the buyer.

Under the passive activity loss rules, an investor in a direct participation program may generally use passive losses to:

• a.Offset passive income from other passive activities✓
• b.Offset wages and other earned income without any limit
• c.Offset portfolio income such as dividends and interest
• d.Offset only gains from the sale of the same program's units

Passive losses can generally be deducted only against passive income (Internal Revenue Code Section 469), with unused losses carried forward. They do not shelter earned income or portfolio income. Offsetting gains only from the same program is a narrower rule than the law applies.

A U.S. investor owns an American depositary receipt (ADR) for a foreign company. Which statement is correct?

• a.The ADR gives the investor a direct claim on the foreign company's bonds
• b.The ADR trades in the foreign currency, so the investor bears no dollar risk
• c.It trades in dollars, but the investor still bears currency risk✓
• d.The ADR eliminates currency risk because it is denominated in dollars

A U.S. bank holds the foreign shares and issues ADRs that trade in dollars, but the underlying value still moves with the foreign currency. The ADR price reflects exchange rates even though quoted in dollars. ADRs represent equity, not debt.

A company has cumulative preferred stock outstanding, and it skipped last year's $2 per share dividend. What must happen before it pays any common dividend this year?

• a.The common stockholders must vote to approve the preferred payment
• b.The $2 in arrears and the current preferred dividend must be paid first✓
• c.The preferred shares must be converted into common stock
• d.Only the current preferred dividend must be paid; arrears are forgiven

Cumulative preferred stockholders must receive unpaid dividends in arrears plus the current dividend before common holders receive anything. Forgiveness describes non-cumulative preferred. A vote is not required for the payment, and conversion is a separate feature.

Which statement about a Section 3(c)(7) private fund is correct?

• a.Its investors need only meet the accredited-investor test
• b.It is limited to 100 beneficial owners
• c.It must register as an open-end investment company
• d.Its investors must generally be qualified purchasers✓

A 3(c)(7) fund is excluded from the Investment Company Act definition because its securities are owned only by qualified purchasers, such as individuals holding at least $5 million in investments. Meeting only the accredited-investor test is not enough. The 100-owner limit belongs to the 3(c)(1) exclusion, and registering as an open-end company is what the exclusion avoids.Investment Company Act of 1940 Section 3(c)(7); 15 U.S.C. 80a-3(c)(7)

A municipal bond yields 2.5% and a Treasury of similar risk yields 3.5%. An investor indifferent between them has an implied marginal federal tax rate of about:

• a.28.6%✓
• b.71.4%
• c.35.0%
• d.1.0%

The break-even rate is 1 - (municipal yield / taxable yield) = 1 - 2.5/3.5 = 28.6%. The figure 71.4% is the ratio itself (2.5/3.5), not one minus it. The 35.0% figure is simply a familiar bracket and is not derived from the yields. The 1.0% figure is the gap between the yields, not a tax rate.

An investor worried about inflation eroding the real return on bonds would most likely consider:

• a.long-term fixed-rate Treasury bonds with constant coupons
• b.zero-coupon Treasury strips with a fixed maturity value
• c.fixed-rate corporate bonds paying a higher stated yield
• d.TIPS, whose principal is adjusted for CPI changes✓

TIPS principal is adjusted for CPI changes, and the fixed rate is paid on the adjusted principal, so income and principal keep pace with inflation. Long-term fixed-rate Treasuries lose the most when inflation rises. A zero-coupon strip pays a fixed amount known today, so inflation reduces its real value. A higher corporate yield compensates for credit risk, not inflation, and the coupon remains fixed.

Compared with a coupon bond of the same maturity, a zero-coupon bond is:

• a.more exposed to default, because zero-coupon issuers are all lower-rated
• b.equally sensitive to interest-rate changes, because both mature on the same date
• c.more sensitive to rate changes, since all of its value is paid at maturity✓
• d.less sensitive to interest-rate changes, because it pays no coupons to reinvest

A zero-coupon bond has a duration equal to its maturity, which is longer than that of a coupon bond with the same maturity, so its price swings more. Lacking coupons removes reinvestment risk but raises price sensitivity. Equal maturity does not mean equal sensitivity, since coupons shorten a bond's duration. Credit quality depends on the issuer, and many zero-coupon bonds are Treasury strips.

The extra yield on a high-yield (junk) bond compared with a Treasury of similar maturity primarily compensates the investor for:

• a.higher liquidity of the market for junk bonds
• b.a higher chance that the issuer will default on interest✓
• c.a greater exposure to the inflation rate over time
• d.the absence of any call provisions in the indenture

High-yield bonds are issued by borrowers with weaker credit, so the premium mainly pays for default risk. Inflation affects all fixed-rate bonds similarly and is not the main source of the spread. Many high-yield bonds are callable, so an absence of call features does not explain the yield. The junk-bond market is generally less liquid than the Treasury market, so liquidity does not justify the lower price.

Which right do common stockholders typically have that preferred stockholders usually do not?

• a.A fixed dividend paid before any common dividend
• b.A claim ahead of bondholders if the company liquidates
• c.The right to vote for directors and on major matters✓
• d.The right to convert the shares into corporate bonds

Common stock normally carries voting rights, while preferred is typically non-voting. Neither stock has a claim ahead of bondholders, who rank above all stockholders. A fixed dividend with priority over common is a feature of preferred stock. Conversion into bonds is not a standard feature of either class.

Which statement describes preferred stock as compared with common stock?

• a.It is a debt security, not an equity security, under the securities laws
• b.It has dividend and liquidation priority over common, but usually no vote✓
• c.It pays a dividend that rises automatically as the company's earnings grow
• d.It ranks behind common stock in a liquidation, though it usually carries a vote

Preferred stock has priority over common for dividends and in liquidation and usually does not vote. Ranking behind common stock in liquidation reverses the priority. Preferred dividends are generally fixed, not tied to earnings. Preferred stock is an equity security, ranking below debt but above common stock.

When an investor buys open-end mutual fund shares, the price paid is:

• a.the market price at the moment the order is entered during the trading day
• b.a price negotiated between the investor and the fund's portfolio manager
• c.the next NAV computed after the order is received, usually at the close✓
• d.the net asset value at the opening of the day on which the order is placed

Open-end funds use forward pricing: orders get the next NAV, which is normally computed once per day after the market closes. Intraday market prices apply to exchange-traded shares such as closed-end funds and ETFs. The morning NAV is not available at that time, so orders cannot be priced at it. The price is formula-based, not negotiated.

Which statement about closed-end funds is correct?

• a.Their shares trade only at a discount to net asset value, never at a premium
• b.Their shares trade on an exchange at a price that may be above or below NAV✓
• c.They continuously issue new shares and redeem shares at the investor's request
• d.Their shares are always priced at net asset value, as set by the fund each day

A closed-end fund issues a fixed number of shares in an offering, and they then trade in the secondary market at a price set by supply and demand, either at a premium or at a discount. Pricing at NAV each day describes open-end funds. Trading only at a discount is wrong because premiums also occur. Continuous issuance and redemption is the open-end structure.

How do exchange-traded funds (ETFs) differ from traditional open-end mutual funds?

• a.ETF shares trade throughout the day at market prices✓
• b.ETFs cannot track an index and are always actively managed
• c.ETF shares are priced once per day after the market closes
• d.Individual investors redeem shares directly with the fund company at NAV

ETF shares trade on an exchange all day at market-determined prices. Once-a-day pricing after the close is how traditional mutual funds work. Many ETFs track an index, and individual investors normally sell on the exchange, while direct redemption with the fund at NAV is the mutual fund method; only authorized participants redeem ETF shares with the fund.

A unit investment trust (UIT) is best described as:

• a.a partnership giving each investor an individually managed account
• b.a pooled fund that continuously creates and redeems shares each day
• c.a fixed, unmanaged portfolio of securities with a set termination date✓
• d.a managed portfolio that is continuously rebalanced by an adviser

A UIT buys a fixed portfolio and holds it until it terminates, with no active management. Continuous rebalancing by an adviser describes a managed fund. Continuous creation and redemption describes an open-end fund. A UIT is a pooled investment, not an individually managed account.

A REIT that owns shopping centers and collects rent from the tenants is classified as:

• a.a real estate LP
• b.a mortgage REIT
• c.an equity REIT✓
• d.a hybrid REIT

A REIT that owns properties and earns rental income is an equity REIT. A mortgage REIT holds real estate loans and earns interest. A hybrid REIT mixes both. A limited partnership is a different legal structure and does not give the pass-through treatment of a REIT.

A convertible bond appeals to investors because it offers:

• a.bond income with downside support and the chance to share in a stock rise✓
• b.protection against interest-rate risk on the bond component
• c.a guaranteed profit if the stock price remains above the conversion price
• d.a yield higher than a straight bond of the same credit quality would pay

A convertible pays interest and has a bond floor, and the conversion feature adds equity upside. Because the conversion option has value, the coupon is usually lower than on a straight bond, not higher. Conversion produces a profit only if the stock rises enough, and nothing is guaranteed. The bond component remains exposed to interest-rate risk.

A call option is in the money when:

• a.the stock price is below the strike price, so the call is worth exercising
• b.the premium paid is larger than the option's intrinsic value
• c.the stock price is above the strike price, giving the call intrinsic value✓
• d.the option is expected to be profitable if held until expiration day

An in-the-money call has a strike price below the current stock price, which gives it intrinsic value equal to the difference. A call with a strike above the market price is out of the money. Being in the money describes the current price relationship, not a forecast of profit. The premium paid has no bearing on whether an option is in the money.

An investor buys a put on a stock already held in the portfolio. This protective put:

• a.sets a floor under the stock's price at the put's strike price✓
• b.caps the stock's potential gain at the put's strike price
• c.profits only if the stock price rises above the strike
• d.generates premium income for the investor while holding the stock

A protective put gives the right to sell at the strike, which limits the loss if the stock falls while leaving the upside open. The gain is not capped. Buying a put costs premium; collecting premium comes from selling an option. A put gains in value when the stock falls below the strike.

Selling a covered call on shares one already owns is most suitable for an investor who:

• a.expects a sharp rally and wants to keep every dollar of the upside
• b.will not accept any chance of the shares being called away
• c.is bearish and wants full protection against a falling stock price
• d.is neutral to modestly bullish and accepts capped upside for income✓

The premium adds income, but the shares may be called away if the price rises above the strike, so the strategy suits a neutral to modestly bullish view. An investor expecting a sharp rally would give up too much of the upside. The premium offers only limited protection against a falling price, so a bearish investor needs a different strategy. An investor who cannot accept the shares being called away should not write calls at all.

Variable annuities are classified as securities because:

• a.the income payments depend on how long the owner lives and not on markets
• b.the insurer guarantees a fixed rate of return for the whole contract term
• c.the owner bears the investment risk and the value follows the market✓
• d.the contract is sold only by agents who hold a life insurance license

In a variable annuity the owner bears the investment risk, which is the feature that makes it a security. An insurer guaranteeing a fixed return describes a fixed annuity. Lifetime payments are an insurance feature and exist in fixed annuities too. A life insurance license alone does not determine whether a product is a security; the sale of a variable annuity also requires securities registration.

A fixed annuity appeals to conservative investors mainly because it:

• a.fully protects the owner against rising prices
• b.offers equity-like growth with no risk of loss
• c.credits a guaranteed minimum interest rate✓
• d.allows tax-free withdrawals before age 59 and a half

A fixed annuity promises a minimum interest rate backed by the insurer, which suits investors who want predictable results. Equity-like growth with no risk is not available. Earnings withdrawn before age 59 and a half are generally taxable and may be penalized. A fixed credited rate does not follow inflation, so purchasing-power risk remains.

A fixed-indexed annuity has an 80% participation rate and a 6% cap. The index gains 10%, the participation rate is applied first, and the result is limited by the cap. What interest is credited?

• a.8%
• b.10%
• c.4.8%
• d.6%✓

Applying the 80% participation rate to the 10% index gain gives 8%, and the 6% cap then limits the credit to 6%. The 8% figure forgets the cap. The 10% figure ignores both features. The 4.8% figure applies the cap first (6% x 80%), which reverses the stated order.

A bond ladder holds bonds that mature in 1, 3, 5, 7 and 9 years. A main benefit of the strategy is:

• a.all of the bonds mature in the same year, which keeps the portfolio simple
• b.it removes both interest-rate risk and reinvestment risk from the portfolio
• c.maturing bonds provide regular cash to spend or reinvest at current rates✓
• d.it is guaranteed to outperform bullet and barbell maturity structures

Because one rung matures regularly, the investor gets liquidity and reinvests at prevailing rates without betting on a single date. No strategy removes interest-rate or reinvestment risk. A ladder has no guaranteed advantage over other maturity structures. The staggered maturities are the whole point; a single maturity date describes a bullet.

Class A mutual fund shares typically suit an investor who:

• a.invests heavily or holds long term, earning breakpoint discounts✓
• b.plans to sell within a year or two, when a back-end load would not apply
• c.wants no front-end sales charge and accepts higher annual fees instead
• d.has little to invest and prefers a higher annual 12b-1 fee instead

Class A shares carry a front-end sales charge that shrinks at breakpoints for larger purchases and is spread over a long holding period, so they suit large or long-term investors. Class A shares carry no back-end load, and a short holding period makes the up-front charge costly. An investor who wants no front-end charge and accepts higher annual fees is describing a level-load class such as Class C. A small investor preferring higher annual fees is also better served by that class, since Class A has lower ongoing fees.

A client says a fiat-backed stablecoin pegged to $1 carries no real risk. Which statement describes the main risk the representative should explain?

• a.Balances up to $250,000 are covered by FDIC insurance, so only amounts above that limit are exposed to loss
• b.The issuer's board resets the peg each day, so the only exposure is a change in the posted redemption rate
• c.Holders are lenders to the issuer and earn a fixed coupon, so the main exposure is a rise in interest rates
• d.The coin can trade below $1 if its reserves are inadequate or too illiquid to meet redemptions✓

A stablecoin holds its peg only if the reserve assets are sufficient, liquid, and honestly reported; if confidence breaks, a run on redemptions can push the market price under $1. FDIC deposit insurance does not cover stablecoins or other crypto assets, so there is no $250,000 backstop. The peg is not reset by a board each day; it rests on the reserves. Holders do not receive a coupon as lenders, so interest-rate risk is not the central issue.

A client holds digital assets on a crypto trading platform that is not a registered broker-dealer or SIPC member. The platform files for bankruptcy. Which statement about the client's position is most accurate?

• a.The client may be only an unsecured creditor and could recover just part of the balance, with no FDIC or SIPC coverage✓
• b.SIPC will replace missing assets up to $500,000, because customer property held for trading is always protected
• c.FDIC insurance will cover the client's balance up to $250,000, since the platform holds the assets in a bank-style account
• d.The client's coins are legally segregated in the client's name and can be withdrawn in full from the platform's custodian

When a platform fails, customers whose coins were commingled or lent out can rank as unsecured creditors and recover only a fraction. FDIC insurance covers deposits at insured banks and does not insure crypto assets, and SIPC protects customers of failed member broker-dealers, which this platform is not. Segregation in the client's name is a feature some custodians offer but cannot be assumed; it is exactly what the failed platform may lack.

A client wants bitcoin exposure without managing private keys. Compared with owning bitcoin directly, which feature describes a spot bitcoin exchange-traded product (ETP)?

• a.Shares trade in a brokerage account and a custodian holds the bitcoin, but the price still swings with bitcoin✓
• b.Holders can request delivery of their share of the underlying bitcoin and its private keys at any time on request
• c.The fund holds futures contracts rather than bitcoin, so returns are reduced or enhanced by the cost of rolling contracts
• d.The sponsor guarantees the share price against declines, which removes the price volatility of bitcoin from the investment

A spot bitcoin ETP holds bitcoin through a custodian and lists its shares on an exchange, so the investor avoids key management but keeps full exposure to bitcoin's price swings. No sponsor guarantees the price. Holding futures describes a futures-based product, not a spot one. Retail holders of the shares cannot demand the underlying coins or their keys.

A digital asset falls 40% from $50,000 to $30,000. What percentage gain from $30,000 is needed to return to $50,000?

• a.About 40%
• b.About 66.7%✓
• c.About 50%
• d.About 60%

The recovery needed is the $20,000 loss divided by the lower base of $30,000, which is 66.7%. A 40% gain on $30,000 only reaches $42,000, because the percentage applies to the smaller balance. A 50% gain reaches just $45,000, and a 60% gain, found by subtracting the 40% loss from 100% without recomputing the base, reaches $48,000. Deep drawdowns need disproportionately large gains, a core volatility risk for digital assets.

An underwriting syndicate is selling 4,000,000 new shares in an IPO at $25 per share and holds a 15% over-allotment (greenshoe) option. If the option is fully exercised, how much additional money does the issuer raise?

• a.$600,000
• b.$115,000,000
• c.$17,250,000
• d.$15,000,000✓

Fifteen percent of 4,000,000 shares is 600,000 additional shares, and 600,000 times $25 is $15,000,000. The base deal alone is $100,000,000, so $115,000,000 is the total including the option, not the additional amount. Applying 15% to that $115,000,000 total gives $17,250,000, which wrongly compounds the option on itself. The figure of 600,000 is the number of shares, not dollars.

A registered follow-on offering consists of 2,000,000 shares sold by existing shareholders, and the company issues no new shares. What is the effect on the company?

• a.It receives the proceeds, but it must retire an equal number of shares from the market
• b.It receives the proceeds, and its earnings per share are diluted by the added shares
• c.It receives none of the proceeds, and its number of shares outstanding is unchanged✓
• d.It receives none of the proceeds, but its shares outstanding rise by 2,000,000

A secondary offering is a sale by holders of shares that already exist, so the money goes to the sellers and the issuer's share count does not change. Dilution and new proceeds come from a primary offering of newly issued stock. Retiring shares would be a buyback, which is unrelated to a selling-shareholder offering. The share count cannot rise when no new shares are created.Securities Act of 1933 Section 5

A special purpose acquisition company (SPAC) sold units in its IPO and placed the proceeds in a trust account. It reaches its charter deadline without completing a business combination. What typically happens?

• a.The SPAC converts to a Rule 419 blank check company and must re-escrow the funds under that rule
• b.The SPAC liquidates, and public shareholders receive a pro rata share of the trust account✓
• c.The sponsor keeps the trust account as compensation for the unsuccessful search
• d.Public shareholders keep their shares, which are cancelled without any refund of the trust

Public shareholders are beneficiaries of the trust, so if no deal closes they are entitled to their pro rata share of the funds, and the sponsor's founder shares, typically about 20% of the post-IPO equity, receive nothing from the trust. The sponsor does not take the trust for itself. A SPAC does not turn into a Rule 419 company at its deadline. Cancelling shares without refunding the trust would defeat the redemption protection that defines the structure.

A blank check company's Rule 419 offering became effective on March 1, 2026, and its proceeds are held in escrow. No qualifying acquisition has closed. By what date must the escrowed funds be returned to investors?

• a.September 1, 2027✓
• b.March 1, 2027
• c.March 1, 2028
• d.September 1, 2026

Rule 419 requires return of the escrowed funds if a qualifying acquisition has not occurred by a date 18 months after the effective date of the initial registration statement, and 18 months from March 1, 2026 is September 1, 2027. March 1, 2027 would be only 12 months, March 1, 2028 would be 24 months, and September 1, 2026 would be just 6 months. The 20 to 45 business day period in the rule is the investors' reconfirmation window after an acquisition is proposed, not the deadline.Securities Act Rule 419

A private fund avoids registration as an investment company by relying on Section 3(c)(1). Which condition must it satisfy?

• a.Its securities are held by fewer than 500 holders of record, with annual reports filed with the SEC
• b.Its securities may be held by any number of investors, if each is a qualified purchaser
• c.Its securities are held by no more than 35 investors, each of whom must be accredited
• d.Its securities have no more than 100 beneficial owners and are not offered publicly✓

The 3(c)(1) exclusion is limited to funds with no more than 100 beneficial owners that do not make or propose a public offering. The 35-investor figure belongs to the non-accredited limit in Rule 506(b) offerings. Allowing any number of holders if all are qualified purchasers describes the separate 3(c)(7) exclusion. The 500-holder-of-record test comes from Exchange Act Section 12(g) registration, not from the Investment Company Act.Investment Company Act of 1940 Section 3(c)(1)

A hedge fund charges a 20% performance fee on gains above its high-water mark. A unit's value peaked at $120, dropped to $100, and ended the next year at $130. Ignoring other fees, what performance fee applies per unit?

• a.$2.00✓
• b.$26.00
• c.$4.00
• d.$6.00

The fee applies only to value above the $120 high-water mark: $130 minus $120 is $10, and 20% of $10 is $2.00. The $6.00 answer charges 20% of the $30 recovery from the $100 trough, which the high-water mark exists to prevent. The $4.00 figure charges 20% of the $20 needed just to get back to the prior peak, and $26.00 charges 20% of the entire ending value, which is not a performance fee.Investment Advisers Act of 1940 Section 205

An investor commits $2,000,000 to a private equity fund. The general partner has so far called 35% of commitments. How much can the general partner still call from this investor?

• a.$1,300,000✓
• b.$2,000,000
• c.$700,000
• d.$650,000

The called amount is 35% of $2,000,000, or $700,000, which leaves an unfunded commitment of $1,300,000 that the investor must be ready to fund on later capital calls. The $700,000 figure is the amount already paid in, not the amount remaining. The $650,000 answer takes 65% of $1,000,000, a wrong base. The full $2,000,000 cannot be called again because $700,000 has already been contributed.

A registered closed-end fund operates as an interval fund. Which requirement describes how it provides liquidity under Rule 23c-3?

• a.It provides liquidity through exchange trading, so no repurchase offers are required
• b.It must redeem any shares presented on a trading day at NAV within seven days
• c.It repurchases shares only when its board decides to, with no minimum percentage required
• d.It must make periodic offers to repurchase between 5% and 25% of its shares at NAV✓

An interval fund adopts a fundamental policy to make repurchase offers at set intervals of three, six, or twelve months, each for at least 5% and no more than 25% of its outstanding shares, priced at NAV. A tender-offer fund is the structure that repurchases at the board's discretion. Daily redemption within seven days is the open-end mutual fund standard. Relying on exchange trading describes an ordinary listed closed-end fund.Investment Company Act of 1940 Rule 23c-3

An investor buys an exchange-traded note (ETN) tracking a commodity index. The issuing bank is sharply downgraded while the index stays flat. What is the most likely effect on the ETN?

• a.It must be redeemed at par, because the exchange that lists the notes guarantees the issuer's payments
• b.Its price may fall, since holders bear the issuer's credit risk even with the index unchanged✓
• c.It converts to shares of the issuer, because the downgrade triggers the notes' conversion feature
• d.Its price is unaffected, because the notes are backed by a segregated pool of the index components

An ETN is an unsecured debt obligation of the issuing institution and holds no underlying portfolio, so a downgrade can lower its price even if the index is flat, and issuer default can mean a loss of principal. An ETF, not an ETN, holds the underlying assets. Exchanges do not guarantee issuer payments. ETNs do not carry a conversion feature that exchanges them for issuer stock.

A 2x leveraged ETF seeks twice the daily return of an index and starts at $100. The index falls 10% on day one and rises 10% on day two. What is the fund's approximate value after two days?

• a.$99.00
• b.$98.00
• c.$100.00
• d.$96.00✓

The fund returns minus 20% on day one, leaving $80, and then plus 20% on day two, which gives $96. The index itself ended at $99 from a 100-to-90-to-99 path, a 1% loss. Doubling that two-day index change would suggest $98, but daily reset and compounding make the result worse. A flat $100 treats the minus 20% and plus 20% as cancelling, which ignores the smaller base after the loss.FINRA Regulatory Notice 09-31