NASAA Series 66 — All Questions

An investor puts $10,000 in a structured note linked to an index that has a 15% downside buffer: the first 15% of index decline causes no loss, and further declines are lost one-for-one. The index falls 30% by maturity and the issuer is solvent. What does the investor receive at maturity?

• a.$5,500
• b.$7,000
• c.$10,000
• d.$8,500✓

The buffer absorbs the first 15% of the decline, leaving a 15% loss, and 15% of $10,000 is $1,500, so the payout is $8,500. The $7,000 figure ignores the buffer and passes through the full 30% decline. The $10,000 answer treats the note as fully principal protected, but a buffer protects only against part of the loss. The $5,500 answer adds the buffer to the decline, which penalizes the investor instead of protecting them.FINRA Regulatory Notice 12-03

Which statement best describes a reverse convertible note?

• a.It protects principal if held to maturity and pays a set share of any gain in the linked stock
• b.It is convertible into the issuer's common stock at the holder's option at any time before maturity
• c.It pays a below-market coupon in return for unlimited participation in the linked stock's gains
• d.It pays an above-market coupon, and principal is at risk if the linked stock falls below a set barrier✓

A reverse convertible is a short-term structured note whose high coupon is paid in exchange for the investor accepting downside risk on a linked stock or index; if the reference asset breaches the barrier, repayment is in shares or a reduced amount. Principal protection with partial participation describes a different structured note. A conversion option exercisable by the holder describes an ordinary convertible bond; here the form of repayment depends on the stock's performance. The coupon is higher, not lower, and upside is generally capped.FINRA Regulatory Notice 10-09

An investor in the highest tax bracket sells shares of a physically backed gold trust (a grantor trust) after three years, realizing a $10,000 gain. Ignoring the 3.8% net investment income tax, what is the maximum federal rate on this gain?

• a.20%
• b.28%✓
• c.37%
• d.15%

The IRS treats an investor in a physically backed metal trust as owning an undivided interest in the metal, and gain on collectibles held over a year is taxed at a maximum rate of 28%. The 20% rate applies to most other long-term capital gains and 15% to middle brackets. The 37% rate is the top ordinary income rate, which applies to short-term gains, not to long-term collectibles gain.Internal Revenue Code Section 1(h)

An employee was granted incentive stock options on June 1, 2023 and exercised them on March 1, 2025. Which is the earliest of these sale dates that would be a qualifying disposition?

• a.April 15, 2026✓
• b.March 15, 2027
• c.August 15, 2025
• d.January 15, 2026

A qualifying disposition requires holding the shares for more than 2 years from grant (past June 1, 2025) and more than 1 year from exercise (past March 1, 2026), so April 15, 2026 is the earliest listed date meeting both. January 15, 2026 satisfies the grant test but is under a year after exercise. August 15, 2025 passes the 2-year grant test, yet falls only five months after exercise. March 15, 2027 would qualify but is not the earliest, and it reflects the mistaken view that two years must run from exercise.Internal Revenue Code Section 422(a)(1)

An employee exercises 2,000 nonqualified stock options with a $12 exercise price when the stock trades at $40, and keeps the shares. What ordinary income does she generally recognize at exercise?

• a.$28,000
• b.$80,000
• c.$24,000
• d.$56,000✓

The taxable spread is the $40 market value minus the $12 exercise price, or $28 per share, and 2,000 shares times $28 is $56,000 of ordinary income at exercise. The $80,000 figure is the full market value of the shares. The $24,000 figure is only the cost paid to exercise. The $28,000 answer is the per-share spread applied to 1,000 shares, a miscount of the shares exercised.Internal Revenue Code Section 83

An executive receives restricted stock units (RSUs) that vest in three years and will be settled in shares. Which statement about a Section 83(b) election is correct?

• a.No election is available, because the RSUs are only a promise of future shares; income arises at settlement✓
• b.An election is available within 30 days of vesting, fixing the income at the vesting-date value
• c.An election is available only if the RSUs are settled in cash rather than in shares of company stock
• d.An election is available within 30 days of the grant, fixing income at the grant-date value of the shares

Section 83(b) applies to property transferred in connection with services, and an unfunded, unsecured promise to deliver shares later is not property, so RSU holders cannot make the election and are taxed at ordinary rates when the shares are delivered. The 30-day window is real for restricted stock but it runs from the transfer, so it does not rescue RSUs at grant. A vesting-date election is not provided by the Code. Cash settlement does not create an election right either.Internal Revenue Code Section 83(b); Treas. Reg. 1.83-3(e)

A bond with a 7% coupon and ten years to maturity trades at 108 and is callable in four years at 103. How do its yields compare?

• a.The yield to call is higher than the yield to maturity, because the principal is returned sooner
• b.The yield to call equals the current yield, because both ignore the call price and the premium
• c.The yield to call equals the yield to maturity, because both use the same 7% coupon and price
• d.The yield to call is lower than the yield to maturity, so the yield to worst is the yield to call✓

At a price of 108 the bond is a premium bond, and the premium must be amortized over a shorter period to a lower call price, so the yield to call (about 5.4%) is below the yield to maturity (about 5.9%); the lower of the two is the yield to worst. Earlier return of principal raises the yield only for discount bonds. The coupon is the same, but the cash flows and redemption values differ, so the yields differ. The current yield ignores the premium amortization and the call price altogether.

A BBB corporate bond yields 6.35% and a same-maturity Treasury yields 4.60%. Later the corporate yield is 6.85% and the Treasury yield is 4.85%. What happened to the credit spread?

• a.It widened by 25 basis points, from 175 to 200✓
• b.It widened by 50 basis points, from 175 to 225
• c.It narrowed by 25 basis points, from 200 to 175
• d.It was unchanged, because both yields rose

The initial spread is 6.35% minus 4.60%, or 175 basis points, and the later spread is 6.85% minus 4.85%, or 200 basis points, so it widened by 25 basis points. The 50 basis point answer counts only the corporate yield's rise and ignores the Treasury's. Both yields rose, but by different amounts, so the spread did not stay unchanged. A narrowing would require the corporate yield to rise less than the Treasury yield.

A married couple has $300,000 in a joint checking account, $200,000 in a joint CD, and the husband has a $400,000 savings account in his name alone, all at one FDIC-insured bank. Assuming equal withdrawal rights on the joint accounts, how much is uninsured if the bank fails?

• a.$400,000, from the savings and both joint accounts
• b.$150,000, all in the husband's savings account✓
• c.$200,000, in the savings and the joint checking account
• d.$650,000, under one $250,000 limit for the household

Single-ownership deposits are insured to $250,000, so $150,000 of the husband's $400,000 is uninsured. Joint accounts are insured to $250,000 per co-owner, so the couple's $500,000 of joint deposits is fully covered. The $200,000 answer applies a $250,000 limit to each joint account as a whole instead of per owner, and the $400,000 answer treats all joint deposits as one $250,000 account. The $650,000 answer insures only $250,000 for the whole household.12 CFR 330.6 and 330.9

A $300,000 whole life policy has a $45,000 policy loan outstanding and $3,000 of accrued loan interest when the insured dies. What death benefit is paid to the beneficiary?

• a.$255,000
• b.$297,000
• c.$300,000
• d.$252,000✓

Any outstanding loan and unpaid interest are deducted from the proceeds, so $300,000 minus $45,000 minus $3,000 leaves $252,000. The $255,000 answer subtracts only the loan principal and forgets the accrued interest. The $297,000 answer deducts only the interest. The full $300,000 would be paid only if the policy had no loan, since an unrepaid loan reduces the death benefit.

A 45-year-old overfunds a life insurance policy so heavily that it fails the 7-pay test and becomes a modified endowment contract (MEC). How is a policy loan she later takes taxed?

• a.It is taxable only if the policy is later surrendered, and the 10% additional tax applies only then
• b.It is tax-free, because a loan against cash value life insurance is borrowing and not income
• c.It is a distribution taxed as gain first, with a 10% additional tax before age 59 1/2✓
• d.It is taxed on a first-in, first-out basis, so basis comes out first and no penalty applies

Loans from a MEC are treated like distributions, so they are taxed to the extent of gain in the contract, last-in, first-out, and a 10% additional tax applies to the taxable amount before age 59 1/2. Tax-free loans are the benefit of a policy that is not a MEC. First-in, first-out ordering is the treatment of ordinary non-MEC withdrawals, not MEC distributions. The tax is not deferred until surrender, because the loan itself is the taxable event.Internal Revenue Code Sections 7702A and 72(e)(10)

A client's variable annuity has a guaranteed lifetime withdrawal benefit (GLWB) rider with a $400,000 benefit base and a 5% annual withdrawal rate. The account value has fallen to $150,000. What does the rider guarantee?

• a.$20,000 a year for life, even if the account value falls to zero✓
• b.$20,000 a year only for as long as the account value stays above zero
• c.$20,000 a year until $400,000 has been paid out, and then payments end
• d.$7,500 a year for life, because the rate applies to the current account value

The guaranteed withdrawal is the 5% rate times the $400,000 benefit base, or $20,000, and the insurer must keep paying for life even after the account is exhausted. The $7,500 answer wrongly applies the rate to the lower account value. Ending at $400,000 of total payments describes a guaranteed minimum withdrawal benefit, not a lifetime one. Paying only while value remains would remove the guarantee the rider is purchased to provide.

Which statement correctly contrasts a non-traded REIT with an exchange-listed REIT?

• a.The REIT is exempt from the 90% income distribution rule, so its payouts are less certain over time
• b.Shares trade intraday at negotiated prices on an exchange, with liquidity similar to a listed REIT
• c.Redemptions are limited by caps and can be suspended by the REIT, and there is no active secondary market✓
• d.Upfront selling commissions and fees are lower, since no distribution network sells the shares

Non-traded REITs are illiquid: share redemption programs usually limit the amount redeemed and the REIT may suspend or end them, and shares do not trade on an exchange. Intraday trading describes a listed REIT. Non-traded REITs are sold through broker-dealers and typically carry heavy upfront charges, not lower ones. A REIT, listed or not, must distribute at least 90% of taxable income to keep its pass-through status; distributions may still be paid from offering proceeds or borrowings.

An ETF's shares trade at $50.60 while its NAV per share is $50.00. Which action by an authorized participant is expected, and what is its effect?

• a.It buys ETF shares on the exchange and redeems them for the basket of securities, pushing the price toward NAV
• b.It buys shares directly from the fund at $50.60, so the premium widens until the fund adjusts
• c.It delivers the basket of securities for new ETF shares and sells them, pushing the price toward NAV✓
• d.It delivers the basket for new ETF shares and sells them, pushing the NAV up toward the market price

At a premium, an authorized participant buys the basket of securities, deposits it with the ETF in exchange for creation-unit shares, and sells those shares at the higher price, adding supply that pulls the price back toward NAV. Buying shares and redeeming them is the discount trade. NAV is set by the underlying holdings, so selling shares cannot lift it. Authorized participants deal with the fund at NAV, not at the market price.

On December 14, an investor buys 1,000 shares of a mutual fund at a $20.00 NAV. The next day the fund pays a $1.50 per share long-term capital gain distribution, reinvested, and NAV drops to $18.50. What is the tax result in a taxable account?

• a.The $1,500 is taxed as a long-term capital gain distribution, though the shares were held one day✓
• b.The $1,500 is taxed as short-term gain, because the shares were held less than one year
• c.Nothing is taxed this year, because the $1,500 drop in NAV exactly offsets the distribution
• d.The $1,500 is not taxed until the shares are sold, because the distribution was reinvested

Capital gain distributions are reported by the shareholder as long-term gain regardless of how long the shares were held, and reinvesting does not defer the tax. The 1,000 shares were bought just before the distribution, so the investor owes tax on gains earned before ownership and received back part of the purchase price. The NAV drop does not cancel the taxable distribution; it only affects basis.Internal Revenue Code Section 852(b)(3)

An investor owns 100 shares bought at $50 (now $50), buys one 45 put for $1.50, and writes one 55 call for $2.00. What is the maximum loss at expiration?

• a.$500
• b.$5,000
• c.$450✓
• d.$550

The put establishes a floor $5 below the $50 cost, so the stock can lose $5 per share. The net premium is a $0.50 credit ($2.00 received minus $1.50 paid), which reduces the loss to $4.50 per share, or $450 on 100 shares. The $500 answer ignores the credit. The $550 figure adds the credit instead of subtracting it, and $5,000 assumes the stock could fall to zero with no protection.

A cereal manufacturer will buy 50,000 bushels of wheat in four months and fears higher prices. Which approach hedges that risk, and why?

• a.Sell wheat futures, so gains on the contracts offset a higher cash price at purchase
• b.Write wheat call options, so the premium received fully offsets a higher cash price
• c.Buy wheat futures, so gains on the contracts offset a higher cash price at purchase✓
• d.Buy wheat put options, so gains on the puts offset a higher cash price at purchase

A buyer who will need the commodity later is short the physical market and hedges by going long futures; if prices rise, the futures gain offsets the higher purchase cost. Selling futures is the producer's hedge and would add losses if prices rise. A put gains when prices fall, so it does not cover a price rise. Writing calls brings in only a limited premium and leaves the manufacturer exposed to a large increase.

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)

At least what portion of a REIT's gross income must come from rents from real property, interest on mortgages secured by real property, and gains from sales of real property?

• a.90%
• b.60%
• c.50%
• d.75%✓

The REIT income test requires at least 75 percent of gross income from real-estate sources, excluding prohibited-transaction income. The 90 percent figure is a separate gross income test on a broader list and also the minimum distribution rate, so it is tempting but is not the real-estate-source test.IRC Sec. 856(c)(3)

At the close of each quarter, what must be true of a REIT's total assets?

• a.At least 25% must be securities of other REITs
• b.At least 90% must be real estate assets with no cash or securities
• c.At least 75% must be real estate assets, cash and government securities✓
• d.At least 50% must be mortgage loans on property in the REIT's home state

The asset test requires three quarters of total assets to be real estate assets, cash items and government securities, with the securities limitations applying to the rest. The statute sets no home-state requirement, and a high allocation to other REITs is not a requirement.IRC Sec. 856(c)(4)(A)

A master limited partnership's units trade on an established securities market. What generally allows it to avoid being taxed as a corporation?

• a.At least 90% of its gross income must be qualifying income, such as interest, dividends, real property rents and certain natural resource income✓
• b.It must distribute at least 90% of its net income to unit holders each year, because distribution rather than income source determines its tax status
• c.It must have fewer than 100 limited partners at all times
• d.It must register as a regulated investment company under the 1940 Act

A publicly traded partnership is treated as a corporation unless 90 percent or more of its gross income is qualifying income. The distribution threshold belongs to funds and REITs, publicly traded units can far exceed 100 holders, and a partnership that could qualify as a fund is excluded from this exception.IRC Sec. 7704(a), (c)(2) and (d)

A life insurance policy qualifies under the cash value accumulation test if, by its terms, the cash surrender value:

• a.may never exceed the net single premium needed at that time to fund the future benefits✓
• b.may never exceed the total of premiums paid in the first seven policy years
• c.must equal at least the death benefit by age 65
• d.must stay below the amount borrowed against the policy

Under the cash value accumulation test, cash value is capped at the net single premium for the future benefits. The seven-year comparison belongs to the separate modified endowment contract test, and the other choices describe no qualification requirement.IRC Sec. 7702(b)(1)

A life insurance policy fails the seven-pay test of Section 7702A. What is the result?

• a.The policy lapses and the insurer must refund every premium paid
• b.It is a modified endowment contract, so withdrawals and loans are taxed gain first and may carry a 10% additional tax before age 59 and a half✓
• c.It is no longer treated as life insurance, so the death benefit is fully taxable to the beneficiary and the policy must be surrendered within sixty days
• d.Withdrawals are tax-free up to premiums paid, as they are for any other life policy, because the basis is always recovered first and the policy stays qualified

A policy whose premiums paid in the first seven years exceed the cumulative seven level annual premiums becomes a modified endowment contract. The death benefit generally stays income-tax free, but lifetime distributions lose the basis-first treatment that other life policies receive and are taxed gain first.IRC Sec. 7702A(a)-(b)

Under Rule 419, a blank check offering places investor funds in escrow. If a qualifying acquisition has not occurred by 18 months after the effective date, what must happen?

• a.The funds are held until each investor makes a written request for a refund
• b.The issuer may keep the funds for an additional 18 months if it files an amended prospectus
• c.The escrowed funds must be returned to purchasers within five business days✓
• d.The funds are released to the issuer to continue searching for an acquisition

Rule 419 requires return of escrowed funds by first-class mail or equally prompt means within five business days after the 18-month date. Investors need not ask, and the issuer has no right to use the funds in the meantime.17 CFR 230.419(e)(2)(iv)

A blank check company completes an acquisition under Rule 419. How long do purchasers have after the effective date of the post-effective amendment to confirm that they want to stay invested?

• a.No fewer than 5 and no more than 10 calendar days
• b.Exactly 30 calendar days
• c.Up to 12 months, as long as the issuer is notified in writing
• d.No fewer than 20 and no more than 45 business days✓

The reconfirmation window runs from 20 to 45 business days after the effective date. A purchaser who does not respond by the end is entitled to a refund, so silence is not consent to stay invested.17 CFR 230.419(e)(2)(ii)

How long are the terms of Treasury bills sold by the U.S. Treasury, and how are they sold?

• a.From four weeks to 52 weeks, sold at a discount or at par, with face value paid at maturity✓
• b.Only 26 weeks, sold at a premium to face value
• c.From two years to 30 years, with interest added to principal
• d.From one year to ten years, paying a semiannual coupon and redeemed at face value only at the end of the term

Bills have terms ranging from four to 52 weeks and are sold at a discount or at par; the holder receives face value at maturity. Semiannual coupons are the feature of notes and bonds, not bills.TreasuryDirect, Treasury Bills

A saver has $250,000 in a single-owner share account and $250,000 in a joint account with a spouse at the same federally insured credit union. How is NCUA share insurance applied?

• a.Each is insured separately up to $250,000 per member-owner in its ownership category, so the single account is covered in full✓
• b.Only $250,000 is insured in total because the same person owns both accounts, and insurance is applied to the member rather than to each account
• c.Only the joint account is insured because it has two owners, and the single account is not insured when the same person also holds the joint one
• d.Each is insured up to $100,000 per account

NCUA insures up to $250,000 per member-owner for each ownership category, such as single accounts, joint accounts and certain retirement accounts. The single account is fully covered, and the joint account is insured on a per-owner basis, so the two categories are not combined.NCUA share insurance, 12 CFR Part 745

A client wants to exchange an existing annuity contract for a life insurance policy and keep the deferral of gain. What is the tax treatment?

• a.It is tax-free if the life policy has a higher death benefit than the cash value of the annuity, and the same insurer issues both contracts in a single transaction
• b.It is tax-free, as exchanges of insurance products are all covered, and the type of contract received does not affect the deferral, provided the same insurer issues both
• c.It is tax-free if the client is older than 59 and a half
• d.The exchange is not within the tax-free exchange rules, because an annuity may be exchanged for another annuity but not for a life insurance policy✓

The rule permits life insurance for life insurance, endowment, annuity or long-term care, and annuity for annuity or long-term care. It does not permit an annuity to be exchanged for life insurance, so gain is taxable. Age and death benefit size have no effect on this limit.IRC Sec. 1035(a)

An investor holds 10 call option contracts on a stock. Each contract covers 100 shares, and the delta of each call is 0.40. About how many shares of stock does the position behave like for a small move in the stock price?

• a.1,000 shares
• b.400 shares✓
• c.40 shares
• d.4,000 shares

Delta approximates how much an option moves for a one-dollar move in the stock. Ten contracts control 1,000 shares, and at a delta of 0.40 the position behaves like 400 shares. Using 4,000 ignores the shares-per-contract multiplier, and 1,000 ignores delta.NASAA Series 66 Content Outline, Topic III