NASAA Series 66 — All Questions

An employee leaves after exactly four years of service. The employer's $10,000 matching contribution follows the statutory two-to-six-year graded vesting schedule. How much of the match belongs to the employee?

• a.$8,000
• b.$6,000✓
• c.$4,000
• d.$10,000

Graded vesting runs 20% after two years, then 40%, 60%, 80% and 100% after six years, so four years means 60% of $10,000, or $6,000. $4,000 is the three-year (40%) figure. $8,000 is the five-year (80%) figure. $10,000 would be the result of the shorter three-year cliff schedule, a different permitted schedule.IRC section 411(a)(2)(B)(ii)

A participant has a vested 401(k) balance of $60,000 and asks for the largest loan the plan can allow. What is the maximum, assuming the plan permits loans?

• a.$60,000
• b.$10,000
• c.$50,000
• d.$30,000✓

The cap is the lesser of $50,000 or the greater of $10,000 and half of the vested balance: half of $60,000 is $30,000, which is above $10,000 and below $50,000. $10,000 is only the floor for small balances. $50,000 ignores the half-of-balance limit. $60,000 is the entire balance, which a loan cannot exceed.IRC section 72(p)(2)(A)

A 40-year-old takes a hardship withdrawal from a 401(k) to buy a first home. How is the withdrawal taxed?

• a.Ordinary income plus the 10% additional tax, since the first-home exception is limited to IRAs✓
• b.Ordinary income only, since the first-home exception applies to every employer plan alike
• c.Tax-free, if the funds are used for the principal residence within 120 days
• d.As ordinary income with the additional tax waived, since hardship status exempts it

A hardship withdrawal is not itself an exception to the 10% additional tax, and the $10,000 first-time homebuyer exception applies to IRA distributions, not to 401(k) plans. The hardship label does not waive the tax. The 120-day period is an IRA concept and still does not make the withdrawal tax-free. The exception is not available across every plan.IRC section 72(t)(2)(F); Treas. Reg. 1.401(k)-1(d)(3)

A small business funds a SEP-IRA with 12% of compensation for the owner. What contribution must it make for an eligible employee earning $40,000?

• a.$10,000, since the employer must equal the owner's dollar contribution amount
• b.$0, since employees fund a SEP through their own deferrals
• c.$4,800, since the same percentage applies to every eligible employee✓
• d.$1,200, since the employer match is limited to 3% of pay

SEP contributions must be allocated by a written formula that gives all eligible employees the same percentage of pay, so 12% of $40,000 is $4,800. The 3% figure belongs to the SIMPLE IRA match. A standard SEP has no employee deferrals. Matching the owner's dollar contribution would not follow a uniform percentage.IRC section 408(k)(3)(C)

An employee earning $60,000 defers 5% of pay into the employer's SIMPLE IRA. The employer uses the standard matching formula. What is the employer match?

• a.$600, the 1% reduced-match election
• b.$1,800, a match of 3% of pay✓
• c.$1,200, the 2% nonelective contribution
• d.$3,000, matching the full 5% deferral

The standard SIMPLE match is dollar for dollar up to 3% of compensation, so 3% of $60,000 is $1,800 even though the employee deferred $3,000. Matching all of the deferral ignores the cap. The $1,200 figure is the 2% nonelective alternative, which is given regardless of deferrals. $600 is the 1% reduced match, which the employer may elect only in limited years and must announce in advance.IRC section 408(p)(2)(A)(iii)

Which description fits a cash balance plan?

• a.A defined contribution plan in which the participant selects investments and carries the risk
• b.A defined benefit plan that credits each participant with a hypothetical account balance✓
• c.A profit-sharing plan in which the employer's yearly contribution is entirely discretionary
• d.A nonqualified deferral arrangement held on the employer's balance sheet

A cash balance plan is a defined benefit plan: the employer funds it, carries the investment risk and promises a benefit stated as a hypothetical account balance. Participant-directed accounts describe a 401(k), a defined contribution plan. Discretionary yearly contributions describe profit sharing. A nonqualified plan lacks the qualified status that a cash balance plan has.IRC section 411(a)(13) and (b)(5)

A self-employed consultant with no employees and $60,000 of net earnings wants to shelter as much as possible. Why might a solo 401(k) beat a SEP-IRA?

• a.It allows employee elective deferrals in addition to an employer contribution✓
• b.It is the only plan permitting a sole proprietor to contribute
• c.It permits participants to avoid every early-distribution additional tax
• d.It allows a much higher employer contribution percentage than a SEP

A solo 401(k) lets the owner make elective deferrals as the employee and an employer profit-sharing contribution on top, which helps at modest income, while a SEP has only the employer contribution. The employer percentage is comparable in both. Early distributions from a 401(k) are still penalized. A sole proprietor can also contribute to a SEP or a SIMPLE.IRC section 401(k); IRC section 408(k)

A 45-year-old leaves county government and withdraws funds from a governmental 457(b) plan. How is the withdrawal taxed?

• a.Ordinary income only, since the 10% additional tax does not reach 457(b) plans✓
• b.As ordinary income plus the 10% additional tax, since the participant is under age 59½
• c.Tax-free, because the account was funded with deferrals of pretax pay from salary
• d.As ordinary income plus 10%, unless the participant has reached age 55 or older

The 10% additional tax on early distributions applies to qualified plans, 403(b) plans and IRAs but not to a governmental 457(b), so a withdrawal after severance is ordinary income only (if rolled to an IRA, later IRA withdrawals would be subject to it). Pretax deferrals are taxable when withdrawn. The age 55 rule is a separate exception for qualified plans that is unnecessary here.IRC section 72(t)(1); IRC section 457(d)

An executive's deferred compensation is held in a rabbi trust, and the employer later becomes insolvent. What is the likely outcome for the executive?

• a.The executive ranks as a secured creditor with first claim on all of the trust assets
• b.The assets are shielded from the employer's creditors because they sit in a separate trust
• c.The PBGC insures the deferred balance up to its annual statutory maximum guarantee
• d.The assets remain reachable by the employer's creditors, so the executive could lose the deferrals✓

A rabbi trust keeps assets reachable by the employer's creditors in insolvency, which is how the executive avoids current taxation under constructive receipt, so the executive is only a general unsecured creditor. Protection from creditors would trigger current tax. The executive has no secured claim. PBGC insurance covers qualified defined benefit plans, not nonqualified deferred compensation.Treas. Reg. section 1.451-2 (constructive receipt)

A 401(k) committee adds a new fund to a menu that already offers a broad range of diversified options. It never compares the fund's fees or performance with alternatives. Which ERISA duty is most clearly implicated?

• a.Plan documents, because the committee departed from the written plan terms
• b.Prudence, because the selection followed no reasoned investigation✓
• c.Diversification, because the committee added only one new fund
• d.Bonding, because the committee did not insure the added investment

ERISA measures prudence by the process a prudent expert would follow, including investigating and comparing alternatives, fees and performance before selecting an investment. The menu was already diversified, and adding one fund does not create a diversification problem. Nothing indicates the plan terms were violated. The bonding rule covers people who handle plan funds and has nothing to do with investment selection.ERISA section 404(a)(1)(B), 29 USC 1104(a)(1)(B)

Which of the following is a prohibited transaction under ERISA for a plan fiduciary?

• a.Making a participant loan under a plan loan program that meets the legal conditions
• b.Buying shares of a mutual fund managed by an unrelated adviser at market price
• c.Buying land from the plan sponsor's president for the plan✓
• d.Paying a recordkeeper reasonable compensation under a written service contract

Buying property from a party in interest, such as the sponsor's president, is a prohibited transaction. ERISA exempts reasonable compensation for necessary services under a reasonable arrangement. Participant loans that follow the plan's loan program and legal conditions are also exempt. Purchasing a fund from an unrelated manager involves no party in interest.ERISA section 406(a); section 408(b)(2)

A disqualified person engages in a prohibited transaction involving $200,000. Assuming the transaction is not corrected in time, what is the first-tier excise tax for the year?

• a.$30,000✓
• b.$200,000
• c.$20,000
• d.$50,000

The first-tier tax is 15% of the amount involved for each year in the taxable period, so 15% of $200,000 is $30,000. $20,000 would be 10%. $50,000 would be 25%, the missed-RMD rate. $200,000 is the 100% second-tier tax, which applies only if the transaction is still uncorrected after notice.IRC section 4975(a) and (b)

To gain liability relief under ERISA section 404(c), a plan must give participants what minimum choices and trading frequency?

• a.At least five diversified options with differing risk and return, changeable annually
• b.At least two diversified options with differing risk and return, changeable monthly
• c.At least three diversified options with differing risk and return, changeable on plan anniversary
• d.At least three diversified options with differing risk and return, changeable at least quarterly✓

The regulation requires at least three diversified investment alternatives, each with materially different risk and return characteristics, and the chance to give investment instructions at least quarterly. Two alternatives is too few and monthly is more frequent than required. Five alternatives is more than the regulation asks, and annual-only changes is too infrequent. The anniversary-only choice fails the quarterly rule.29 CFR 2550.404c-1(b)(2)(ii)

A plan satisfies the section 404(c) conditions. Which responsibility do the plan fiduciaries still keep?

• a.Reporting each participant's investment gains on that participant's tax return
• b.Covering losses that result from a participant's own allocation decisions
• c.Prudently selecting and monitoring the investment options offered on the menu✓
• d.Choosing the asset mix for every participant who gives instructions

Section 404(c) relieves fiduciaries of liability for losses that result from a participant's own exercise of control, but they remain responsible for the prudence of the menu itself. Participant-directed losses are what the safe harbor shields them from. Individual tax reporting belongs to the participant. If a participant gives instructions, the participant, not the fiduciary, chooses the mix.ERISA section 404(c); 29 CFR 2550.404c-1(d)

A participant fails to make an investment election. Which option can the plan use as a qualified default investment alternative?

• a.A fund holding only the sponsoring company's stock, as an eligible account
• b.The plan's highest-yielding fund over the previous three years
• c.A target-date fund keyed to the participant's expected retirement date or age✓
• d.A money market fund, held for as long as the participant remains in the plan

Qualified default investment alternatives are a target-date or lifecycle fund, a balanced fund and a managed account. A capital preservation product qualifies only for the first 120 days after the first contribution, not indefinitely. An employer stock fund is not a QDIA. Past yield is not a criterion at all.29 CFR 2550.404c-5(e)(4)

A plan committee wants to transfer responsibility for selecting plan investments to an outside party. Which appointment achieves this?

• a.An attorney who drafts the investment policy statement for the committee
• b.A registered adviser, bank or insurer that acknowledges fiduciary status in writing✓
• c.The plan's recordkeeper, which places participant trades under its administrative contract
• d.A broker-dealer that provides non-discretionary recommendations on the investment menu

An investment manager as defined in ERISA section 3(38) must be a registered investment adviser, bank or insurance company that has the power to manage plan assets and acknowledges in writing that it is a fiduciary; the committee is then relieved of investment decisions but must still prudently select and monitor the manager. A recordkeeper administers rather than manages. Non-discretionary advice leaves the decision with the committee. An attorney drafting a policy statement does not manage assets.ERISA section 3(38) and section 405(d)

A plan trustee learns that a co-fiduciary is making an imprudent investment with plan assets, takes no steps to remedy it and gains nothing personally. What is the trustee's position?

• a.Liable, because knowing of another's breach and not acting to remedy it creates liability✓
• b.Liable only if the plan document specifically names the trustee as a named fiduciary
• c.Not liable, since liability attaches only to the fiduciary who personally made the investment decision
• d.Not liable, because the trustee received no personal benefit from the imprudent investment

A fiduciary is liable for another fiduciary's breach if it knows of the breach and fails to make reasonable efforts to remedy it. Liability is not confined to the one who acted, and personal profit is not required. The rule applies to anyone who is a fiduciary, whether or not named in the plan document.ERISA section 405(a)(3), 29 USC 1105(a)(3)

A plan holds $7 million in assets handled by plan officials and has no employer securities. What is the required fidelity bond?

• a.$700,000
• b.$350,000
• c.$500,000✓
• d.$1,000,000

The bond must equal 10% of the funds handled, between $1,000 and a maximum of $500,000, so 10% of $7 million is $700,000 but the cap limits it to $500,000. $350,000 would be 5%. $700,000 ignores the cap. The $1,000,000 maximum applies only to plans that hold employer securities.ERISA section 412; 29 USC 1112(a)

A plan document requires a fund that the committee has found imprudent after a fee review. What must the committee do?

• a.Follow the document in every case, since the document controls fiduciary conduct fully
• b.Follow the document only where consistent with ERISA, and so drop the imprudent fund✓
• c.Set the document aside whenever the committee prefers a different approach
• d.Ask the Department of Labor for written permission before changing the fund lineup

Fiduciaries must follow the plan documents only insofar as they are consistent with ERISA, so a document term cannot excuse an imprudent investment. The document does not override the statute. Fiduciaries cannot ignore it merely by preference, since its terms still generally bind them. No agency approval is required before a fiduciary acts prudently.ERISA section 404(a)(1)(D), 29 USC 1104(a)(1)(D)

A parent withdraws $25,000 from a 529 plan in 2026 to pay private elementary school tuition. Assume the K-12 expense limit is $20,000 per beneficiary per year. How is the withdrawal treated?

• a.None of it is qualified, since 529 plans cover only college expenses
• b.Only $20,000 is qualified; the other $5,000 is nonqualified✓
• c.The extra $5,000 is a tax-free rollover to a sibling's account
• d.All $25,000 is qualified, since K-12 tuition is a qualified expense

For tax years after 2025, qualified K-12 expenses are limited to $20,000 per year per beneficiary, so the excess is nonqualified and its earnings portion is taxable and subject to the 10% additional tax. The limit applies, so not all $25,000 qualifies. K-12 tuition has been a qualified expense since 2018. Moving funds to a sibling requires a rollover into another 529 account within 60 days, not a withdrawal.IRC section 529(c)(7)

A beneficiary's 529 account has been open 16 years, and the beneficiary has $50,000 of earned income and no other IRA contributions in 2026. Assuming a $7,500 IRA limit, what is the most that can be rolled to a Roth IRA this year?

• a.$15,000, twice the annual contribution limit
• b.$35,000, the lifetime maximum for such rollovers
• c.$0, since the account must be open at least 20 years
• d.$7,500, the annual IRA contribution limit✓

A 529-to-Roth rollover requires an account open 15 years and is capped each year at the IRA limit (reduced by other IRA contributions) and at $35,000 over a lifetime. The lifetime cap is not an annual amount. Doubling the limit is not allowed. Fifteen years, not twenty, is the holding requirement, so the account qualifies.IRC section 529(c)(3)(E)

A child's grandparents and an aunt each contribute $1,500 to the child's Coverdell ESA in the same year. The contribution limit is $2,000 per beneficiary. What is the result?

• a.No excess, since each contributor stays below the $2,000 per-donor limit
• b.The $2,500 excess is treated as income taxable to the child, with no excise tax
• c.A 10% additional tax on the entire $4,500 that was contributed to the account
• d.A $2,500 excess contribution, subject to a 6% excise tax each year it remains✓

The $2,000 limit applies to all contributions for one beneficiary from every contributor combined, so $4,500 leaves $2,500 in excess, taxed at 6% each year until withdrawn. The limit is per beneficiary, not per donor. The 10% additional tax applies to nonqualified distributions, not excess contributions. The excess is not income to the child; the excise tax is the cost.IRC sections 530(b)(1)(A)(iii) and 4973(e)

In 2026 a 17-year-old dependent has $5,000 of interest and dividend income and no earned income. Using the $1,350 standard deduction base, how much is taxed at the parents' rate under the kiddie tax?

• a.$1,350
• b.$5,000
• c.$3,650
• d.$2,300✓

The first $1,350 is sheltered by the child's standard deduction and the next $1,350 is taxed at the child's rate, so unearned income above $2,700 goes at the parents' rate: $5,000 - $2,700 = $2,300. $1,350 is only the first band. $3,650 subtracts only the standard deduction. $5,000 taxes all of it at the parents' rate.IRC section 1(g); Rev. Proc. 2025-32

A 40-year-old in the 24% bracket withdraws $3,000 from an HSA and spends it on a vacation. What is the combined federal income tax and additional tax cost?

• a.$1,020
• b.$1,320✓
• c.$720
• d.$600

A distribution not used for qualified medical expenses is ordinary income ($3,000 x 24% = $720) plus a 20% additional tax ($600), a total of $1,320. $720 omits the additional tax. $1,020 applies the 10% IRA-style rate instead of 20%. $600 is the additional tax alone.IRC section 223(f)(2) and (4)

An employee's health FSA plan allows carryover. At year-end the employee has $900 unused, and the 2026 carryover limit is $680. What happens?

• a.$680 is paid out to the employee as taxable income, and $220 is forfeited
• b.Nothing carries over, since FSA balances are always forfeited at year-end
• c.All $900 carries into the next year because the plan allows carryover
• d.$680 may be carried into the next year, and the remaining $220 is forfeited✓

A health FSA may allow a carryover up to a set amount ($680 for 2026), and anything above the limit is forfeited under the use-it-or-lose-it rule. The carryover has a cap, so the full $900 does not move. FSA balances are not paid out in cash; that would defeat the pretax treatment. Forfeiture of everything applies only when no carryover or grace period is offered.IRS Notice 2013-71; Rev. Proc. 2025-32

In 2026 a 40-year-old whose disability began at age 33 asks about opening an ABLE account. Is the person eligible?

• a.No, because onset must have occurred before age 26, as in the original ABLE Act
• b.Yes, because onset of disability before age 46 now qualifies✓
• c.No, because ABLE accounts are limited to beneficiaries under age 18
• d.Yes, but only if a parent or guardian opens the account

The age limit for disability onset rises from 26 to 46 beginning in 2026, so onset at 33 qualifies. The age-26 rule is the prior law. ABLE accounts have no limit tied to being a minor. An eligible adult may open and control the account.IRC section 529A(e)(1)(A)

Two friends own a brokerage account as joint tenants with right of survivorship. One dies, and the will leaves all of that person's assets to a nephew. Who takes the account?

• a.The nephew, because the will controls all property owned at death
• b.The estate, which distributes it after probate under the will
• c.The surviving joint tenant, because survivorship overrides the will✓
• d.The nephew and the surviving joint tenant, each taking half of the account

Property held as joint tenants with right of survivorship passes automatically to the survivor outside probate, regardless of the will. The will cannot reach it. A fifty-fifty division would describe tenants in common only if the decedent could leave a half interest by will. Probate distribution would apply to property titled in the decedent's sole name.Uniform Probate Code section 6-101 (nonprobate transfers); state property law

U.S. citizen spouses own a $1,000,000 home as joint tenants with right of survivorship, and the husband paid the entire purchase price. The husband dies. What amount of the home is included in his gross estate?

• a.$1,000,000, since he paid the full price
• b.$500,000, since half of a qualified spousal joint interest is included✓
• c.$0, since survivorship property passes outside the estate
• d.$250,000, since the marital deduction removes half of the interest

For spouses who are the only joint tenants, a qualified joint interest brings exactly half of the value into the decedent's gross estate, whoever paid for it. Inclusion of the full amount follows the contribution rule that applies to joint owners who are not spouses. Survivorship passes the title outside probate but does not remove the value from the estate. The marital deduction applies after inclusion, to the amount included; it does not halve what is included.IRC section 2040(b)

Which form of ownership is available only to married couples and, in states that recognize it, can shield the property from the creditors of just one spouse?

• a.A custodial account under the Uniform Transfers to Minors Act
• b.Joint tenancy with right of survivorship
• c.Tenancy by the entirety✓
• d.Tenancy in common

Tenancy by the entirety treats the spouses as a single owner with survivorship rights, and in states that recognize it a creditor of only one spouse generally cannot reach the property. Joint tenancy is open to any people and is reachable by a creditor of one owner. Tenancy in common has no survivorship and no married-couple limit. A UTMA account is held for a minor.State property law (tenancy by the entirety)

Spouses in a community property state hold stock with a $200,000 basis. When the first spouse dies, it is worth $600,000. What is the surviving spouse's basis in the stock?

• a.$300,000
• b.$200,000
• c.$400,000
• d.$600,000✓

Under the community property rule both halves get a stepped-up basis at the first death, so the survivor's basis is the full $600,000. $200,000 is the original basis with no step-up. $300,000 steps up only half and ignores the survivor's share. $400,000 is the result for spouses holding as joint tenants in a common-law state, where only the decedent's half is stepped up.IRC section 1014(b)(6)

A client's brokerage account is registered transfer on death to a daughter, but the client's will leaves everything to a son. At the client's death, who receives the account?

• a.The daughter, because the registration passes outside the will✓
• b.The daughter and the son equally, because the two documents conflict
• c.The estate, so the account goes through probate before distribution
• d.The son, because the will states the client's final wishes

A transfer-on-death registration is a contract with the broker that takes effect at death and overrides the will, so the named beneficiary receives the assets without probate. The will governs only probate assets. A conflict does not produce a split. The account would go through probate only if the TOD registration had been absent.Uniform TOD Security Registration Act (nontestamentary transfer on death)

A grandparent dies intestate, and the estate of $300,000 passes per stirpes. One child is living; the other child predeceased, leaving three children. How much does each of the three grandchildren receive?

• a.$50,000✓
• b.$100,000
• c.$75,000
• d.$150,000

Per stirpes divides the estate by branch, so each of the two children's branches receives $150,000, and the three grandchildren split the deceased child's branch for $50,000 each. $75,000 would split the estate among four people equally. $100,000 would split it among only the three grandchildren. $150,000 is the whole branch.Uniform Probate Code section 2-106

Which statement about a revocable living trust is correct?

• a.It can avoid probate for assets titled in the trust, but the assets remain in the grantor's taxable estate✓
• b.It eliminates the step-up in basis at death, because the trust is treated as the owner
• c.It removes the assets from the grantor's taxable estate, since the trust is a separate legal entity
• d.It shields the assets from the grantor's creditors, since the grantor no longer owns them

Because the grantor can revoke or change the trust, assets titled in it avoid probate but are included in the gross estate and reachable by the grantor's creditors. Estate tax removal requires an irrevocable transfer. Assets in the trust still receive a step-up in basis at death, since they are included in the estate.IRC sections 2036 and 2038; IRC section 1014(b)(1)

A 45-year-old receives $50,000 from an ex-spouse's 401(k) under a qualified domestic relations order. Which statement is correct?

• a.It is subject to the 10% additional tax, since the recipient is under age 59½
• b.It is tax-free, since transfers between divorcing spouses never create income
• c.It is taxable to the plan participant, since the account remains the participant's
• d.It is taxable to the recipient, exempt from the 10% additional tax, and may be rolled over✓

A payment to an alternate payee under a QDRO is taxed to the alternate payee, is exempt from the 10% additional tax, and can be rolled into an IRA. The participant is not taxed on a QDRO payment to a spouse or former spouse. The tax-free divorce transfer rule applies to IRA transfers incident to divorce, not to payments out of an employer plan.IRC section 402(e)(1)(A); IRC section 72(t)(2)(C)

A client contributes appreciated stock to a donor-advised fund. Which statement is accurate?

• a.The client takes the deduction only in each later year in which the fund makes a grant
• b.The gift is irrevocable, and the client may take a deduction in the year of contribution✓
• c.The client may reclaim the assets later, since the fund is held in the client's own name
• d.The fund's earnings are taxed to the client each year as they accrue

A donor-advised fund contribution is a completed, irrevocable gift to the sponsoring charity, and the donor has only advisory privileges over grants, so the deduction is available when the contribution is made. The donor cannot take the assets back. The deduction does not wait for grants. The fund is a charity, so its earnings are not taxed to the donor.IRC section 170(f)(18); IRC section 4966

A client's agent under a durable power of attorney tries to sell the client's securities after the client dies. What is the status of that authority?

• a.It ended at the client's death, and the executor now has authority over the estate✓
• b.It continues because "durable" means the authority survives the principal's death
• c.It continues until the brokerage firm receives a copy of the death certificate
• d.It survives for a short period so that open transactions may be completed

A power of attorney, durable or not, ends when the principal dies; durability means it survives the principal's incapacity. After death, the personal representative named in the will controls the estate's assets. Notice to the firm does not extend the authority. A short survival period is not recognized by agency law.Uniform Power of Attorney Act section 110

A parent retitles a $400,000 account as joint tenants with right of survivorship with an adult son, and nothing else shows a different intent. The parent's will divides everything equally among three children. At the parent's death, who owns the account?

• a.All three children equally, since the will states the parent's wishes
• b.The son alone, since survivorship overrides the will✓
• c.The son alone only if he contributed to the account
• d.The estate, since adding a joint owner does not change title

Retitling the account as joint tenants with right of survivorship gave the son survivorship rights, so it passes to him alone at death, whatever the will says. The will does not control survivorship property. Contribution is not required for survivorship ownership. The account passes outside the estate; the other children could prevail only with evidence that the parent never meant survivorship, such as a convenience account, and the stem rules that out.State property law (joint tenancy); Uniform Probate Code section 6-212

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.