CPWA ALL SECTIONS EXAM QUESTIONS
AND REVISED ANSWERS 2024-2025
UPDATE (ALREADY GRADED A+)
1. Planning implications of stock option award programs - Answer- - Conversion of
income = converting it from Ordinary to capital gains tax rates- Ensure you get
qualifying distributions for ISOs (unless stock price is decreasing)- unregistereed shares
under 144 must be held for a minimum of 12 monts (6 months for registerred shares)-
NQSOs: a. To avoid section 409A, the exercise price must not be less than the value of
the stock on the date of the grant b. At the time of grant, NQSOs are not taxed to the
employee provided they DO NOT have a readily ascertainable fair market value c.
NQSOs are transferable during the employee's lifetime.
2. Tax planning implications of exercises of both incentive and non-qualified stock
options (e.g. basis, holding periods, and alternative minimum tax (AMT)) - Answer- -
Taxation of NSOs: Taxed at the exercise date, difference between FMV of the stock and
the exercise price is recognized as additional compensation unless the stock is
restricted, payroll taxes must also be withheld upon exercise (cashless exercise can
have the company hold back enough of the grant to pay for taxes so you just receive
the Net amount), spread between the grant price and exercise price is W-2 income and
difference between exercise price and selling price is cap gain- Taxation of ISOs: If
qualifying distribution (hold for 1 year from exercise and 2 years from grant) the
difference between grant price and sales price is all at cap gains, if disqualifying
distribution then its treated as NQSO, difference between grant price and exercise price
is tax adjustment item for AMT- a. To avoid section 409A, the exercise price must not
be less than the value of the stock on the date of the grant b. At the time of grant,
NQSOs are not taxed to the employee provided they DO NOT have a readily
ascertainable fair market value c. NQSOs are transferable during the employee's
lifetime.- ISOs can be exchanged for common stock without counting as a disqualifying
disposition- transferring shares to an Irrev Trust would result in a disqualifying
disposition- ISOs CANNOT exceed an aggregate value of first time exercise of
$100,000- NQSO are not transferrable during the clients lifetime
3. Advantages and disadvantages of Section 83(b) elections in option strategies -
Answer- - 83b election is telling IRS tax me on all my options on day of grant at current
stock price, this way if stock price increases you don't have to pay the increased price.
The risk is, if you pay tax up front but price of stock goes down then you paid too much
tax. You cannot sell your stock until your stock has vested- Most stock is eligable for
,83b election. RSU's are NOT eligible (RSAs, options, ISO, are eligible)- Taxed at cap
gains rates
4. Different types of executive deferred compensation plans - Answer- - NQDC -
ordinary income deferred until distribution. Deferring income to a later date, sort of like a
401k plan but for salary- Excess benefit plan: funded or unfunded plan maintained by an
employer solely for the purpose of providing benefits for employees in addition to the
benefits that may be funded througha qualifies plan, but not in excess of the sections
401a limitation of $280,000
5. Equity compensation plans (restricted stock, phantom stock, and performance share
plans), how to evaluate them in different scenarios, and the tax implications of each -
Answer- - RSUs: Do you think the stock will increase? Should you sell the stock as soon
as it vests to realize the full income or risk it going down (as you've already paid tax) or
risk it going up and then only having to pay cap gains on the increase. Only time RSUs
are not taxed upon vest is if 83b (or 83i) election is made- Phantom Stock Plan: A way
for a company to give stock without actually giving it. This also is beneficial for the
company because they dont have to pay taxes on the phantom stock until its paid. You
get the cash amount for what the stock is worth at the vest date. Do NOT get the actual
stock. Qualifying dispositions = exchanging stock for stock, stock swap/ pyramiding-
Performance stock or shares: Units granted but only received if certain criteria are met,
shares are taxed similar to RSUs and taxes at vesting, I. executive recognizes no
income at time of grant III. performance goals are often hard to determine and quantify
appropriately- ESPP cap per year = $25k
6. Regulatory rules and restrictions governing a corporate executive's publicly held
stock (e.g. short-swing profits, insider information, exercise windows, and policies
unique to the issuing company) - Answer- - essentially everything has to be cleared
before selling or purchasing shares- set up 10b5-1 plans to purchase or sell to avoid
these rules or compexities with them- Rule 144: a) Holding period must be 6 months if
reportig company, 12 months if non reporting/ unregisterred company b) max trading
volume in 3 month period has to be less than 1% of the outstanding shares or less than
the previous 4 weeks ave trading volume d) Must notify the SEC if sales of more that
5,000 shares or $50,000 over a 3 mo period d) Adequade current public informaiton and
e) no solicitation- Short swing profit rules prohibit directors, officers, owners of > 10%
stock from buying and reselling stock within 6 months
7. Value, risks, and tax implications of utilizing cashless collars in concentrated stock
situations - Answer- - Zero cost collar - purchase market put could accomplish the same
thing- don't provide liquidty, don't monitise- Primary objective is to HEDGE -- don't want
to recognize capital gain today (moving from CA to FL next year) - Purchases put option
(with sell call option premium) below current market price and sells call option above
current market price agains holdings for net zero premium- Equity swap with collar is
most tax advantageous heding solution (not a prepaid forward)
, 8. Value, risks, and tax implications of utilizing prepaid variable forwards in concentrated
stock situations - Answer- - Collars to provides same hedge as prepaid forward with
additional benefit- Reduced downside in positions while deferring capital gains and
retaining stock owner benefits- Additional advantage provides liquidity, doesn't
recognize cap gain, get divs (not at qualifying rate tho) and voting rights- Dissadvantage
-- ceiling on upside exposure, self financing, no separate loan vehicle required-
Downside protection with upfront liquidity (provides sometimes 85% of the current
value)- You do NOT get the stock dividends if you sign up for a Prepaid
10. Value, risks, and tax implications of utilizing exchange funds in concentrated stock
situations - Answer- - Private placement, exempt from registration- Avoids publicity
since contribution is not public sale and does not require 144- Diversifies and deferrs
taxation- Diversify because many investors contribute shares- Exchange public shares
for interest in the exchange fund- IRC 721 requires minimum 20% exposure to non-
liquid holdings to avoid constructive sale- Get step up in basis at death still, goal is
diversification- Illiquid for 7 years, can be expensive, acceptance of shares is
determined by the fund
11. Value, risks, and tax implications of utilizing charitable remainder trusts in
concentrated stock situations - Answer- - Provides current income without selling and
paying taxes on the sale- Locks in the value you can give to charity- Ongoing income
stream for reamainder of trust term or your life
12. Value, risks, and tax implications of utilizing Section 10b-5(1) plans in concentrated
stock situations - Answer- - Prohibits an insiders ability to trade on insider inforation-
Avoids liability, manage public perception, Provide liquidity- Plan must be in place
before material information, specifiy amount and price, cannot have a corresponding
hedging position
1. What constitutes full compliance with statutory and regulatory requirements - Answer-
-Abide by the code of professional responsibility and be in technical compliance but also
not engage in anything that calls into question ethical behavior - Follow FINRA, I&WI
and other regulatory bodies principles
2. The rules pertaining to and consequences of violations of the Investments & Wealth
Institute's Code of Professional Responsibility - Answer- - Professional review board
(PRB) (can serve if you have institute designation for at least 2 years) - Consequences
could come from Violations of the code, violation of fed or state laws, Failure to respond
to disciplinary action hearing or violation of the license agreement - Possible actions
could include a private letter censure, public letter censure, suspension of certification,
termination of certification- Cannot issue legal disciplinary action or revote licenses
issues by states- CE requires 40 hours every 2 years (2 hours of ethics and 1 hour of
tax/regulation)
3. The rules and expectations for proper use of the marks of the CPWA
certification/designation - Answer- - Abbreviation for CPWA must be in all uppercase -
