Client Advisory Services Flashcards
7 cards from real CEP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Client Advisory Services flashcards as text
An executive holds vested NQSOs and is concerned about a potential stock price decline. Which strategy directly hedges the downside risk of the option position before exercise?
Answer: Purchasing put options on the company's stock
Purchasing put options on the company's stock directly hedges downside risk by giving the holder the right to sell at a set price, protecting against a price decline.
Under what circumstance would a participant's ISO exercise trigger 'disqualifying disposition' treatment?
Answer: The participant sells shares acquired via ISO exercise less than 2 years from grant date or less than 1 year from exercise date
A disqualifying disposition occurs when ISO shares are sold before meeting both holding periods: 2 years from grant date and 1 year from exercise date.
A client wants to gift appreciated company stock to a donor-advised fund (DAF) to maximize tax efficiency. Which outcome correctly describes this strategy?
Answer: The client avoids capital gains tax on appreciation and receives a charitable deduction for the full fair market value at the time of the gift
Donating appreciated stock directly to a DAF allows the donor to avoid capital gains on the appreciation and claim a deduction for the full fair market value, subject to AGI limitations.
Which of the following best describes a 'net exercise' (or net share settlement) for stock options?
Answer: The participant receives shares net of those withheld by the company to cover both exercise price and taxes
In a net exercise, the company withholds shares sufficient to cover both the exercise price and applicable taxes, and delivers only the net shares to the participant.
A departing employee holds both vested NQSOs and vested ISOs. Their separation agreement provides a 90-day post-termination exercise window. After 90 days, what happens to any unexercised ISOs?
Answer: They expire and are forfeited with no value
Unexercised ISOs that are not exercised within 90 days of termination expire and are forfeited per the plan terms; they do not automatically convert to NQSOs.
When advising a concentrated equity position holder on diversification, which risk is MOST unique to concentration in a single employer's stock?
Answer: Idiosyncratic (company-specific) risk that cannot be diversified away
Idiosyncratic risk is company-specific and cannot be eliminated through diversification; holding a concentrated position in one employer's stock exposes the employee to both employment and investment risk simultaneously.
A participant in a Section 423 ESPP purchases shares at a 15% discount and sells them immediately after purchase. This results in a:
Answer: Disqualifying disposition with the discount taxed as ordinary income
Selling immediately after purchase is a disqualifying disposition; the 15% discount is taxed as ordinary income, and any additional gain or loss is a short-term capital gain or loss.