EXHIBIT G
INVESTMENT ADVISORY AGREEMENT
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INVESTMENT ADVISORY AGREEMENT (the "Agreement"), dated July 2,
2002, between Fortress Investment Trust II (the "Trust"), a Delaware business
trust, and FIG Advisors LLC (the "Advisor"), a Delaware limited liability
company. Except as otherwise expressly provided herein or unless the context
otherwise requires, capitalized terms not otherwise defined herein shall have
the meanings specified in the Trust's Declaration of Trust, dated July 2, 2002
(the "Declaration").
In consideration of the mutual promises and agreements herein
contained and other good and valuable consideration, the receipt of which is
hereby acknowledged, it is agreed by and between the parties hereto as
follows:
1. In General.
The Advisor agrees, all as more fully set forth herein, to act as
a nondiscretionary investment advisor to the Trust with respect to the
investment of the Trust's assets and to supervise and arrange the purchase of
securities for and the sale of securities held in the investment portfolio of
the Trust all discretion being exercised by the officers of the Trust pursuant
to the delegation of authority therefor made by the Board of Trustees.
2. Duties and Obligations of the Advisor. (a) Subject to the
succeeding provisions of this section and subject to the direction and control
of the Trustees, the Advisor shall (i) act as investment advisor for and
supervise and make recommendations with respect to the investment and
reinvestment of the Trust's assets, subject to the Trust's restrictions and
limitations on investments as set forth in the Declaration, in researching,
making recommendations with respect to purchasing and selling securities and
other assets for the Trust and in voting, exercising consents and exercising all
other rights appertaining to such securities and other assets on behalf of the
Trust, all of which will be implemented by employees of Fortress Capital Finance
II LLC ("FCF") seconded to the Trust and acting as agent therefor; (ii)
supervise continuously the investment program of the Trust and the composition
of its investment portfolio; (iii) supervise the operations and employees of the
Trust's Investment Affiliates, including FCF; (iv) arrange, subject to the
provisions of Section 3 hereof, for the purchase and sale of securities and
other assets held in the investment portfolio of the Trust and its Investment
Affiliates, and the financing and Hedging thereof; (v) arrange for the
administration of all other affairs of the Trust and its Investment Affiliates
and, in this regard, provide supervision of third parties engaged in such
administration; (vi) maintain all of the Trust's books and records other
than those maintained by a third party administrator, transfer agent,
custodian or accountant; and (vii) provide the Trust and its Investment
Affiliates with adequate office space and all necessary office equipment and
services.
(b) The Advisor will use its best efforts to (i) cause the
Trust at all times to be an investment company within the meaning of the
Investment Company Act of 1940, the Rules and Regulations thereunder and any
order applicable to the Trust granted thereunder, in each case as amended from
time to time (collectively, the "1940 Act"), to be duly registered as such
under the 1940 Act and to maintain compliance with the 1940 Act, and (ii)
cause the Trust at all times to qualify and remain qualified for and to
receive the special tax treatment afforded a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). Without limiting the generality of the foregoing, the Advisor
will use its best efforts to (i) cause the Trust's outstanding securities
(other than short-term paper) to be beneficially owned at all times by more
than 100 persons as determined in accordance with the provisions of Section
3(c)(1) of the 1940 Act and (ii) cause the Trust not to be a company described
in Sections 3(c)(5) and/or 3(c)(6) of the 1940 Act. The Advisor will provide
the Trustees a quarterly compliance report reviewing each factor related to
the Trust's RIC qualification.
(c) The Advisor will use its best efforts to cause the Trust
not to (i) invest in securities that would be deemed to be residual interests
of real estate mortgage investment conduits, as such terms are defined in
Sections 860D and 860G of the Code or (ii) otherwise take or fail to take any
action if such action or failure would cause any Shareholder to incur
"unrelated business taxable income" as defined in Section 512 of the Code.
(d) The Advisor will use its best efforts to cause the Trust's
Investment Affiliates, including FCF, to at all times not be investment
companies within the meaning of the 1940 Act.
(e) Subject to Section 2(k) hereof, in the performance of
its duties under this Agreement, the Advisor shall at all times conform to,
and act in accordance with, any requirements imposed by (i) the provisions
of the 1940 Act and of the Investment Advisers Act of 1940, as amended,
including any Rules or Regulations in force thereunder (collectively, the
"Advisers Act"); (ii) any other applicable provision of law; (iii) the
provisions of the Declaration and By-Laws of the Trust, as such documents
are amended from time to time; (iv) the investment objective, policies and
restrictions of the Trust and FCF as set forth in the Trust's registration
statement on Form N-2, as amended from time to time, and any resolutions
adopted by requisite Trustee and/or shareholder approval; and (v) any other
policies and determinations of the Trustees of the Trust. In addition, the
Advisor shall use its best efforts to cause the Trust and FCF and its other
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Investment Affiliates not to engage in any transaction involving any person
known to the Advisor to be subject to Sections 17(a), 17(d) or 17(e) of the
1940 Act with respect to the Trust or any of the Funds such that any such
person would violate any such provision of the 1940 Act.
(f) The Advisor will pay the fees and compensation of the
Trust's officers and Trustees who are "interested persons" of the Advisor,
except that a Majority of the Independent Trustees may approve
reimbursement at cost for the compensation of such officers or members
(other than ▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ and
▇▇▇▇▇ ▇▇▇▇▇▇ (together with their successors, collectively, the
"Principals") and the assistants of the Principals) allocable to time spent
on the legal, accounting and other administrative operations (other than
the provision of investment advice) of the Trust, FCF or its other
Investment Affiliates (and the foregoing provision shall be deemed to be
the "Operating Expense Reimbursement Agreement" referred to in the
Confidential Private Placement Memorandum, as supplemented and amended, of
Fortress Investment Fund II LLC, the Common Shareholder of the Trust). In
addition, the Advisor will bear all costs and expenses of the Trust, FCF
and its other Investment Affiliates not expressly stated in the sections
below to be borne by the Trust or FCF or its Investment Affiliates and
excluding, in any event, the Advisory Fee, which shall be solely the
expense of the Trust.
(g) The Trust agrees to reimburse the Advisor for the
ordinary operating expenses of the Trust and the Advisor for compensation
(subject to Section 2(f) and in any event other than for the Principals and
their assistants), rent and similar overhead expenses, including
maintenance of the Trust's offices, in connection with the management and
advisory services provided hereunder (to the extent not reimbursed by a
portfolio investment of the Trust). In addition, the Trust will bear the
expenses related to its activities including, without limitation, the
evaluation, acquisition, ownership, sale, Hedging or financing of any
potential portfolio investment, taxes, fees of auditors and counsel,
expenses of the Board of Trustees and annual meetings, insurance, travel,
litigation and indemnification expenses, administrative expenses and,
subject to the approval of the Board of Trustees, any extraordinary
expenses. The expenses of the Trust generally described above shall
specifically include, without limitation:
(i) all costs and expenses, if any, incurred in connection with
portfolio investments of the Trust, including without limitation
costs and expenses incurred in evaluating, developing,
negotiating, structuring, acquiring, owning, financing (including
Hedging), disposing of or otherwise dealing with portfolio
investments, and further including, without limitation, any
travel, legal and accounting expenses and other fees and
out-of-pocket costs related thereto, and the costs of rendering
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financial assistance to or arranging for financing for any assets or
businesses constituting portfolio investments;
(ii) all costs and expenses, if any, incurred in monitoring
portfolio investments, including without limitation any travel,
legal and accounting expenses and other fees and out-of-pocket
costs related thereto;
(iii) all costs and expenses incurred relating to the Trust's
activities, including without limitation costs and expenses
incurred in evaluating, developing, negotiating, structuring,
acquiring, owning, financing (including Hedging), disposing of or
otherwise dealing with any prospective investment, whether or not
the Trust actually invests therein, and further including, without
limitation, any travel, legal and accounting expenses and other
fees and out-of-pocket costs related thereto, and the costs of
rendering financial assistance to or arranging for financing for
any assets or businesses constituting any prospective investment;
(iv) portfolio transaction expenses, interest and, to the extent
not borne by FCF or the other Investment Affiliates, reasonable
costs associated with the establishment of the other Investment
Affiliates, outside consultants engaged to assist in the
evaluation of documentation relating to Portfolio Investments and
of related assets, including, if applicable, collateral therefor
and in processing data with respect to the foregoing, and work-out
of distressed portfolio investments;
(v) taxes of the Trust, the fees and expenses of custodians,
pricing services, accounting systems, accounting agents and
auditors, external administrators and transfer and dividend
disbursement agents, counsel, Trustees (but out-of-pocket expenses
only with respect to those Trustees who are partners, directors,
officers or employees of the Advisor), loan servicers and loan
pool trustees, insurance costs of the Trust and litigation costs
of the Trust;
(vi) expenses associated with the distribution of reports and Capital
Call notices to the Shareholders, and any required filings and
registrations, proxy expenses, Securities and Exchange Commission
("SEC") examinations and registered agents;
(vii) expenses relating to any office or office facilities
maintained for the Trust or the portfolio investments separate
from the office or offices of the Advisor;
(viii) brokerage commissions and other investment costs incurred
by or on behalf of the Trust;
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(ix) Operating Expenses of FCF and Investment Affiliates described
in Section 2(h) and any costs associated with employees of FCF
loaned or seconded to the Trust;
(x) to the extent approved by the Board of Trustees and a majority
of Independent Trustees, extraordinary expenses
(such expenses, the "Operating Expenses") to the extent any Operating Expenses
are paid by the Advisor or any Affiliate thereof from its own funds, as the
case may be, and not otherwise reimbursed by any portfolio investment;
provided, however, that the Trust shall be obligated to reimburse the Advisor
or its Affiliate, as applicable, only to the extent such Operating Expenses
are incurred out-of-pocket by such parties on behalf of the Trust. The amount
of Operating Expenses to be borne by the Trust is not subject to any maximum
amount. Notwithstanding anything to the contrary, losses incurred on the
Trust's investments, whether classified as expenses or otherwise, shall be
borne by the Trust.
(h) In the case of FCF and each of the other Investment
Affiliates, Operating Expenses consist of the following, subject to and in
accordance with the approved budget in effect from time to time: personnel
compensation and benefits, the costs associated with recruiting, training,
travel and entertainment, communications, publications, professional dues,
research and information services, software and analytical systems,
supplies, rent, furniture, computer equipment and other fixed assets, the
fees and expenses of custodians, pricing services, accounting systems,
accounting agents and auditors, external administrators, counsel, loan
servicers and loan pool trustees, insurance, taxes, any required filings
and registrations, outside consultants engaged to assist in the physical
evaluation of documentation and of the related assets, including, if
applicable, collateral therefor, and in processing data with respect to the
foregoing; in terest and other financing costs, portfolio transaction
expenses (including, without limitation, the costs of acquiring and
disposing of mortgage loans and other assets and the costs of structuring,
issuing and offering related securities), the costs of incomplete
transactions, litigation expenses (provided that in the case of litigation
expenses of indemnified parties, such expenses will be borne by FCF and
each of the other Investment Affiliates only to the extent provided for
under the terms of written indemnifications provided to such parties by FCF
or the other Investment Affiliates, as the case may be), and such other
expenses as are contemplated in FCF's approved budget. Notwithstanding
anything to the contrary, losses incurred on FCF's or the other Investment
Affiliates' investments, whether classified as expenses or otherwise, shall
be borne by FCF and the other Investment Affiliates, as the case may be.
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(i) At the beginning of each year, the Advisor will, after
consultation with FCF personnel, prepare and submit a budget to the
Compensation Committee to assist the Committee in connection with the
Trust's ownership of FCF based on the Advisor's expertise in such matters.
The budget will consist of an annual estimate of the operating expenses in
the coming year as well as a salary and estimated bonus for each employee
of FCF. Employees of FCF will be compensated in a manner and amount
consistent with the market for comparable professionals, including the
payment of a base salary and cash bonus. At year-end, the Advisor will
submit recommended bonuses for employees to the Compensation Committee that
reflect individual employee performance, aggregate FCF performance as well
as prevailing market employment conditions. The budget as well as the bonus
pool must be approved by a majority of the independent members of the
Compensation Committee. No partner, director, officer or employee of the
Advisor will receive compensation from FCF.
(j) The Advisor shall give the Trust the benefit of its best
judgment and effort in rendering services hereunder, but the Advisor shall
not be liable for any act or omission or for any loss sustained by the
Trust in connection with the matters to which this Agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
(k) The Advisor shall deliver, if such event shall occur,
written notice to the Trust that a "Trigger Notification" (as defined in
the operating company agreement of the initial Shareholder) has occurred
and the date that is the related "Key Person Trigger Date" (as defined in
the operating company agreement of such Shareholder), in which case, as of
such Key Person Trigger Date, the Trust shall be prohibited from entering
into any new investment commitments and from making demands for additional
Capital Contributions other than to fund investments in progress on such
Key Person Trigger Date and liabilities of the Trust; provided, however,
that the Trust may resume operations as though it had not received notice
of such Trigger Notification in the event that the Shareholder subsequently
notifies the Trust that the applicable Shareholder Investors have consented
to the Shareholder's continued making of demands for capital contributions
as though no Key Person Trigger Date had occurred.
(l) From time to time, one or more of the investment
companies or accounts which the Advisor manages or advises may own the same
investments as the Trust. Investment decisions for the Trust are made
independently from those of such other investment companies or accounts;
however, from time to time, the same investment decision may be made for
more than one company or account to the extent the same is permitted under
and in accordance with the 1940 Act. Subject to the foregoing, when two or
more investment companies or accounts managed by the Advisor seek to purchase
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or sell the same securities, the securities actually purchased or
sold will be allocated among the companies and accounts on a good faith
equitable basis by the Advisor in its discretion in accordance with the
accounts' various investment objectives. In some cases, this system may
adversely affect the price or size of the position obtainable for the Trust.
In other cases, however, the ability of the Trust to participate in volume
transactions may produce better execution for the Trust.
(m) The Advisor will (i) use its best efforts to cause all
financing obtained by FCF and any of the other Investment Affiliates to be
non-recourse to the Shareholder Investors and (ii) will not incur
contractual indebtedness on behalf of FCF that is recourse to the
Shareholder Investors.
3. Portfolio Transactions and Brokerage.
The Advisor shall, for the purchase and sale of the Trust's
portfolio securities, recommend that the Trust employ such securities
dealers as will, in the reasonable judgment of the Advisor, result in the
Trust's obtaining the best net results taking into account such factors as
price, including dealer spread, the size, type and difficulty of the
transaction involved, the firm's general execution and operational
facilities and the firm's risk in positioning the securities involved.
Consistent with this requirement, the Advisor is authorized to direct the
execution of the Trust's portfolio transactions to dealers and brokers
furnishing statistical information or research reasonably deemed by the
Advisor to be useful or valuable to the performance of its investment
advisory functions for the Trust.
4. Compensation of the Advisor
During the term hereof, the Trust agrees to pay the Advisor and
the Advisor agrees to accept as full compensation for all services rendered
hereunder an annual advisory fee (the "Advisory Fee") as more particularly
described below. The Advisory Fee will equal 1.00% per year of the lesser
of (i) the Trust's invested capital and (ii) the Trust's average daily NAV
of its assets, determined in accordance with Exhibit A attached hereto and
made a part hereof, on the basis of, as applicable, the Trust's invested
capital or daily NAV of its assets as of the first day of the semiannual
period with respect to which the Advisory Fee is being paid. The Advisory
Fee shall be calculated and paid semiannually in arrears, commencing on
July 2, 2002, and shall be prorated for any partial period, with the
initial payment hereunder.
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5. Indemnity. (a) The Trust hereby agrees to indemnify the
Advisor and each of the Advisor's partners, directors, officers, employees
and controlling persons and the partners, directors, officers and employees
thereof (including any individual who serves at the Advisor's request as a
director, officer, partner, trustee or the like of any of the Trust's
Investment Affiliates (each such person being an "indemnitee") against any
liabilities and expenses, including amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and reasonable counsel
fees reasonably incurred by such indemnitee in connection with the defense
or disposition of any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative body in which
he may be or may have been involved as a party or otherwise or with which
he may be or may have been threatened, while acting in any capacity set
forth above in this Section 5 with respect to the services provided
hereunder or thereafter by reason of his having acted in any such capacity,
except with respect to any matter as to which he shall not have acted in
good faith in the reasonable belief that his action was in the best
interest of the Trust or, in the case of any criminal proceeding, as to
which he shall have had reasonable cause to believe that the conduct was
unlawful; provided, how ever, that no indemnitee shall be indemnified
hereunder against any liability to any person or any expense of such
indemnitee arising by reason of (i) willful misfeasance (which shall
include the conviction of any of its senior officers of a felony), (ii) bad
faith (including fraud), (iii) negligence, (iv) reckless disregard of the
duties involved in the conduct of his position, (v) the material breach by
the Advisor of this Agreement or (vi) the payment to or receipt by the
Advisor or its Affiliates of benefits in violation of this Agreement (the
conduct referred to in such clauses (i) through (vi) being sometimes
referred to herein as "disabling conduct"). Notwithstanding the foregoing,
with respect to any action, suit or other proceeding voluntarily prosecuted
by any indemnitee as plaintiff, indemnification shall be mandatory only if
the prosecution of such action, suit or other proceeding by such indemnitee
was authorized by a majority of the Trustees and a majority of the Investor
Trustees.
(b) Notwithstanding the foregoing, no indemnification shall
be made hereunder unless there has been a determination (1) by a final
decision on the merits by a court or other body of competent jurisdiction
before whom the issue of entitlement to indemnification hereunder was
brought that such indemnitee is entitled to indemnification hereunder, or
(2) in the absence of such a decision, by (i) a majority vote of a quorum
of those Trustees who are neither "interested persons" of the Trust (as
defined in Section 2(a)(19) of the ▇▇▇▇ ▇▇▇) nor parties to the proceeding
("Disinterested Non-Party Trustees") and a majority vote of the Investor
Trustees that the indemnitee is entitled to indemnification hereunder, or
(ii) if such quorum is not obtainable or even if obtainable, if such
majorities so direct, independent legal counsel in a written opinion conclude
that the indemnitee should be entitled to indemnification hereunder. All
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determinations that advance payments in connection with the expense of
defending any proceeding shall be authorized and made in accordance with
Section 5(c) hereof.
(c) The Trust shall make advance payments in connection with
the expenses of defending any action with respect to which indemnification
might be sought hereunder if the Trust receives a written affirmation by
the indemnitee of the indemnitee's good faith belief that the standards of
conduct necessary for indemnification have been met and a written
undertaking to reimburse the Trust unless it is subsequently determined
that he is entitled to such indemnification and if a majority of the
Trustees and a Majority of the Investor Trustees determine that the
applicable standards of conduct necessary for indemnification appear to
have been met. In addition, at least one of the following condi tions must
be met: (1) the indemnitee shall provide adequate security for his
undertaking, (2) the Trust shall be insured against losses arising by
reason of any lawful advances, or (3) a majority of a quorum of the
disinterested Non-Party Trustees and a Majority of the Investor Trustees,
or if a majority vote of such quorum and a Majority of the Investor
Trustees so direct, independent legal counsel in a written opinion, shall
conclude, based on a review of readily available facts (as opposed to a
full trial-type inquiry), that there is substantial reason to believe that
the indemnitee ultimately will be found entitled to in demnification.
(d) The rights accruing to any indemnitee under these
provisions shall not exclude any other right to which he may be lawfully
entitled.
6. Duration, Termination and Amendment. (a) This Agreement
shall be come effective on the date it is approved by the Shareholders of
the Trust and shall continue in effect for an initial period of two years
and thereafter from year to year, but only so long as such continuation is
specifically approved at least annually at a meeting of the Trustees in
accordance with the requirements of the 1940 Act.
(b) This Agreement (i) may be terminated by the Advisor at
any time without penalty upon giving the Trust forty-five (45) days' prior
written notice (which notice may be waived by a majority of the Trustees
including a Majority of the Investor Trustees) if the Trust is in breach of
this Agreement in any material respect and (ii) may be terminated on behalf
of the Trust at any time without penalty upon giving the Advisor sixty (60)
days' prior written notice (which notice may be waived by the Advisor) by
the vote of a majority of the Trustees or by the vote of the holders of a
"majority" (as defined in the ▇▇▇▇ ▇▇▇) of the voting securities of the Trust
at the time outstanding and entitled to vote. This Agreement shall terminate
automatically in the event of its assignment (as "assignment" is defined in the
1940 Act). Furthermore, upon the occurrence of a "Disabling Event" or
delivery of a "Removal Notice" (as such terms are defined in the operating
agreement of the initial Shareholder) and the cessation of the service to the
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initial Shareholder by the first managing member named in such
operating agreement (or an affiliate thereof) as managing member thereof, the
Advisor shall promptly resign, this Agreement shall be terminated and no
Advisory Fee shall be payable for any period after such cessation. Termination
shall not affect any rights either party may have against the other hereunder
as of the date of such termination.
(c) Any amendment to this Agreement (including any increase
in the compensation payable to the Advisor hereunder) must be approved in
accordance with the requirements of the 1940 Act and by a majority of the
Investor Trustees.
7. Notices.
Any notice under this Agreement shall be in writing and shall
be delivered to the other party by hand or registered or certified mail,
return receipt requested, at such address as the other party may designate
from time to time for the receipt of such notice and shall be deemed to be
received on the earlier of the date actually received or on the third day
after the postmark if such notice is mailed first class postage prepaid.
8. Governing Law.
This Agreement shall be construed in accordance with the laws
of the State of New York for contracts to be performed entirely therein
without reference to choice of law principles thereof and in accordance
with the applicable provisions of the 1940 Act, the Advisers Act and other
applicable federal laws.
9. Shareholder Liability.
No Shareholder of the Trust shall be subject in such capacity
to any per ▇▇▇▇▇ liability whatsoever to any Person in connection with
Trust Property or the acts, obligations or affairs of the Trust. No Trustee
or officer of the Trust shall be subject in such capacity to any personal
liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the
Trust, save only liability to the Trust or its Shareholders arising from
bad faith, willful misfeasance, gross negligence (negligence in the case of
those Trustees and officers who are partners, directors, officers or
employees of the Advisor) or reckless disregard for his duty to such Person;
and, subject to the foregoing exception, all such Persons shall look solely
to the Trust Property for satisfaction of claims of any nature arising in
connection with the affairs of the Trust. If any Shareholder, Trustee or
officer, as such, of the Trust, is made a party to any suit or proceeding to
enforce any such liability, subject to the foregoing exception, he shall not,
on account thereof, be held to any personal liability. The Trust shall
indemnify and hold each Shareholder harmless from and against all claims and
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liabilities to which such Shareholder may become subject by reason of his
being or having been a Shareholder, and shall reimburse such Shareholder for
all legal and other expenses reasonably incurred by him in connection with any
such claim or liability.
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IN WITNESS WHEREOF, the parties hereto have caused the
foregoing instrument to be executed by their duly authorized officers as of
the day and the year first above written.
FORTRESS INVESTMENT TRUST II
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
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▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Chief Operating Officer and Secretary
FIG ADVISORS LLC
By: Fortress Investment Group LLC,
as managing member
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
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▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Chief Operating Officer
Exhibit A
VALUATION POLICY AND GUIDELINES
OF
FORTRESS INVESTMENT TRUST II
The Investment Company Act of 1940 (the "Act") obligates
Fortress Investment Trust II (the "Trust") to calculate its net asset
value, which shall be the value of the total assets of the Trust less the
total liabilities of the Trust, including but not limited to, bank and
other borrowings, reverse repurchase agreements, amounts payable for
investments purchased, advisory fees, other accrued expenses, dividends and
other distributions, interest, administration fees, taxes, variation
margin, shares repurchased and organizational costs.
The Act specifies that securities owned by the Trust for which
market quotations are readily available should be valued at "market value"
and that the value of all other securities and assets should be "fair
value" as determined in good faith by the Board of Trustees of the Trust
(the "Board"). The Securities and Exchange Commission ("SEC") has indicated
that trustees may appoint others to assist them in making good faith
determinations that may be required, and it has become common practice for
trustees to establish methodologies and guidelines for the investment
advisor or other evaluators (each such person, whether the advisor or
another evaluator, an "Evaluator") to utilize to make such determinations
and to require such Evaluators to report their determinations to the
trustees or a committee thereof for approval or prospective modification.
This practice takes into account both the valuation expertise of the
Evaluators and the impracticality of having trustees make such valuations
themselves on a day-by-day basis.
The following statement of policy and guidelines details the
principles adopted by the Board for determining those securities for which
market quotations are readily available, for valuing various types of
securities for which market quotations are readily available and for
determining fair value of securities and other assets as to which it is
determined market quotations are not readily available.
I. Policy and Guidelines for Determining Whether Market Quotations Are Readily
Available
A. Subject to the authority of the valuation committee of the
Board (the "Valuation Committee") to review with the Trust's
investment advisor, FIG Advisors LLC (the "Advisor"), its
determinations and require modifications thereto, the
Evaluator shall have the authority to determine whether a
particular security is a security for which market
quotations are readily available.
B. For the foregoing purpose, a security is considered to be one for
which market quotations are readily available if the position can
be disposed of within seven days at approximately the value at
which it is currently marked, assuming no change in general market
values.
C. A security that may not be sold to the public in the country in
which the security is primarily traded without registration with
governmental authorities ("Restricted Securities") will be treated
as a security for which market quotations are not available unless
consideration of the factors set forth in paragraph D below
demonstrates that the standard of paragraph B is satisfied.
D. In making determinations regarding marketability for purposes of
paragraphs B and C above, the Evaluator should consider all
factors that appear to be relevant, including at a minimum the
following:
1. frequency of trading and availability of quotations of the
security or other securities considered to have substantially
similar characteristics, such as credit quality, term,
ranking and structure;
2. the number of dealers or brokers willing to purchase, sell or
effect transactions in the security and the availability of
buyers;
3. the willingness of dealers and brokers to be market makers in
the security;
4. the nature of trading activity including (i) the time needed
to dis pose of a position or part of a position and (ii)
offer and solicitation methods; and
5. any additional factors the Valuation Committee requires as a
general matter or with reference to a particular security.
E. The Evaluator shall prepare contemporaneously with each
calculation of the Trust's net asset value and provide to the
Advisor and the Valuation Committee at each meeting a memorandum
summarizing the basis of determination for each non-Restricted
Security for which the Evaluator determines market quotations are
not readily available and for each Restricted Security for which
the Evaluator determines market quotations are readily available.
All such memoranda and supporting documents shall be
preserved with the records of the Trust for a period not less than
six years after disposition of the security in question.
II. Policy and Guidelines for Valuing Securities for which Market Quotations Are
Readily Available
A. All securities for which market quotations are readily available
shall be valued at market value as of the time of day at which the
Board has determined the net asset value of the Trust should be
calculated.
B. Securities traded on a market for which actual transaction prices
(including at a minimum closing prices) are published daily will
generally be valued at the most recent sale price on the principal
such market for such security prior to the time as of which net
asset value is calculated. However, if the principal such market
is not open for trading at the time as of which the Trust's net
asset value is being calculated, reference shall also be made to
trades occurring in any markets providing more contemporaneous
information and the Trust's valuation may take into account such
subsequent market activity.
C. Securities not described in paragraph B above that are traded on a
market for which bid and ask quotations are published daily shall
be valued at the bid as of the close of the principal such market
for such security, subject to the possibility of adjustment for
subsequent events similar to that provided in paragraph B above.
D. Securities not described in paragraph B or C above shall be valued
based on actual transactions in the same or substantially fungible
securities or based on one or, if appropriate, the average of two
or more firm quotations for approximately the number of units or
principal amount held by the Trust provided as contemporaneously
as practicable during the course of the same day by at least one
bank, securities dealer, mortgage banker or similar institution
that regularly conducts market transactions in the securities in
question. Securities valued by reference to quotations provided by
only one institution shall also be valued by other means from time
to time to help ensure the accuracy of such institution's
quotations.
E. The Evaluator may utilize pricing services and spreads provided
by investment banks, commercial banks and others to the extent
the Evalua tor, in its good faith reasonable judgment, believes
the prices provided or derivable from the spreads provided are
reliable indicators of current value. In determining
reliability, the Evaluator will be required to test such
prices regularly on a spot check basis by reference to
actual transaction prices and firm quotations from market
participants.
III. Policy and Guidelines for Valuing Securities for which Market Quotations
Are not Readily Available and All Other Assets
A. All securities for which market quotations are not readily
available and all assets which are not securities shall be valued
at fair value, which generally is defined as the amount for which
the security or asset could be sold in an orderly disposition over
a reasonable period of time taking into account the nature of the
asset. The Board recognizes that fair value is inherently an
imprecise approximation of actual value at any given point in time
and that such approximation becomes more imprecise as the range
and depth of market participants and information about the
security or other asset diminish.
B. In making determinations of fair value, the Evaluator shall
consider all factors that reasonably appear to such person to be
relevant, and make such inquiry and/or investigation as such
person deems appropriate in the circumstances. Among the potential
factors are the following:
1. type of security or asset;
2. relevant financial statements;
3. cost and principal amount;
4. yield or net income produced;
5. maturity and duration;
6. liquidity;
7. control rights;
8. degree of seniority;
9. conversion features;
10. issuer guarantees;
11. expenses associated with holding the security or asset;
12. expenses of disposition;
13. size of holding;
14. market value of the same or similar securities or assets that
are readily marketable;
15. reports by analysts, appraisers and such other persons as the
Evaluator shall reasonably deem appropriate; and
16. information as to recent transactions in the same or similar
securities or assets.
C. The Evaluator shall utilize primarily one of the following methods
of valuation in the following order of preference:
1. Public market. Where recent public transactions in securities or
assets of the same class or that are highly similar are
available, these will generally provide the most reliable
indicator of current fair value.
2. Private market. Recent transactions in securities or assets of
the same class or that are highly similar may also be reliable
even if such securities or assets are not publicly traded.
3. Analytical method. An analytical method should be used where
relevant transactions are not available but information providing
a reasonable basis for valuation is available, such as
appraisals, analysts' reports, valuation models built on the
market behavior of similar types of securities or assets that are
readily marketable, or valuation models seeking to determine the
inherent value of the streams of income and return of principal
from a particular security or asset.
4. Cost. Cost should be used as the primary basis of valuation only
if none of the other methods is available.
D. Valuation of particular types of securities and assets
1. Open futures contracts traded on an exchange shall be valued on the
same basis as securities for which market quotations are readily
available, by reference to most recent settlement price. Other
open futures contracts shall be valued by reference to exchange
traded contracts if possible or by reference to movements in the
underlying securities, commodities or indices, taking into
account the term of the contract and any early settlement features.
2. Foreign currency exchange contracts shall be valued by using the
current or most recently available applicable spot or forward
price as provided by Reuters America Inc. or another reliable
source.
3. The Trust's investment in Fortress Capital Finance II LLC and
other Investment Affiliates shall be valued on a lookthrough
basis to the net value of the assets of each such entity over its
liabilities. This method of valuation is premised on the fact
that the Trust's interest in each is a controlling interest in an
entity that has a limited term and is not marketable and that the
results of operations of such entities are included in the
results of operations of the Trust and reflect in large part the
values of the assets they hold.
4. Mortgage loans and other receivables acquired as distressed or
nonperforming loans shall be valued at cost, as adjusted for
amortization and other paydowns on the principal balance of such
loans, from the date of acquisition to the date on which a
signifi cant event occurs, such as revaluation of the collateral,
resolution of legal impediments, bankruptcy of the borrower,
restructuring of the loan and so forth. Where a pool of
distressed mortgages are purchased in bulk, the purchase price
shall be allocated among them in the manner in which the
purchaser structured its bid as modified by any further analysis
prior to or closely following closing. When a significant event
affecting valuation occurs, the mortgage loan shall be revalued
on the basis of such event and, if possible, shall thereafter be
valued on an analytical basis (as provided in III(c)(3) above)
rather than a cost basis.
5. Mortgage loans and other receivables which are not distressed
shall be valued in accordance with market-based or analytical
meth odologies (as provided in III(c)(3) above).
6. Real property and other collateral acquired by foreclosure or
other workout mechanism shall be valued at the most recent
appraised value by an independent third party less anticipated
costs of disposition if not taken into account in such appraised
value.
7. Mortgage loans and other receivables acquired by a securities
issuance affiliate shall not be revalued by virtue of such
acquisition.
8. Subordinated securities acquired by the Trust from a securities
issuance affiliate shall be valued at the time of acquisition at
cost and shall thereafter be valued by market or analytical
methods as applicable.
9. Debt securities having a remaining maturity of sixty days or less
are valued at cost adjusted for amortization of premiums and
accretion of discounts, which approximates market value.
E. The Evaluator shall prepare contemporaneously with each
calculation of the Trust's net asset value and provide to the
Advisor, the Valuation Committee and the Board at each meeting a
memorandum regarding the fair value and the basis of determination
of fair value for each security and for each asset (other than
open futures contracts and foreign currency exchange contracts
covered by paragraphs D.1 (first sentence) and D.2) valued at fair
value. All such memoranda and supporting documentation shall be
preserved with the records of the Trust for a period not less than
six years after disposition of the security or asset in question.
IV. Review by the Board
The Board shall review this policy and guidelines at least annually
and shall make such revisions thereto as shall be recommended by the
Valuation Committee and such revisions shall be approved by a
majority of the Trust's Trustees and all of its Investor Trustees.
The Board may, from time to time, select one or more Evaluators to
assist the Valuation Committee and the Board in supervising the
proper valuation of the Trust's assets.