NASAA Series 66 — All Questions

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