Valuation, Materiality and Pricing continued Appropriateness Needless to say, the presence of the types of positions in this discussion can be red flags for both current and prospective investors. In addition to possible concern about the accuracy of fund values, having securities with diminished liquidity can also diminish the liquidity for investor withdrawals. In most cases, aggregate size is the primary concern. The larger the allocation to illiquid (and therefore possibly imperfectly priced) securities, the greater the concern. Lastly, regardless of size, positions with impaired liquidity require added levels of attention by fund management and service providers. The valuation process for non-conventional positions is rarely routine. Responsibilities Please note that administrators are not the valuation experts in the hedge fund vendor circle.

Few, if any, hold themselves out as specialists in securities valuation. While administrators are sometimes said to “price” “normal” marketable securities, those prices are sourced from third parties such as brokerage firms, pricing services, and electronic and print media. The values assigned to other securities are usually those provided by the fund manager, in concert with, and subject to the approval of, the fund’s auditor.

Some funds may elect to engage independent valuation experts with respect to certain securities. Where securities are traded over-the-counter and sales are not reported by a service, managers may solicit bids from dealers and use average or median prices. Such pricing processes should be documented and retained. While an administrator may review such documents, in most cases they are unable to solicit such bids firsthand due to the lack of a direct business relationship with the dealers. While an administrator can help in evaluating the thoroughness of pricing policies, the creation of a Pricing Policy and its maintenance over time is the responsibility of the fund manager.

Note also that the final arbiter in any valuation metric is the auditor; accordingly, a manager considering price adjustments for illiquid positions or considering PIPEs should contact the fund’s auditor and review pricing policies before implementation. This material has been prepared by ALPS for general informational purposes only. It does not constitute tax, legal or investment advice, and is presented without any warranty as to its accuracy or completeness or whether it reflects the most current developments. ALPS does not provide tax, legal or investment advice. You are urged to consult your own tax, legal and investment advisors. 8 © 1994 - Present ALPS e-mail e l e m e n t s @ a l p s i n c .

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