Star Hedge Managers Corp. and BMO Nesbitt Burns Inc.

Headnote

NP 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief granted to allow the administrator of an investment fund to act as prime broker in connection with a portion of the fund's assets -- relief is conditional on the use of an independent third party investment manager by the fund and that the administrator will only accept instructions, with regard to assets it holds as prime broker, from the independent third party investment manager -- relief granted to permit an entity to serve as custodian or sub-custodian of investment funds -- relief was necessary because the filer's financial statements are not publicly disclosed.

Applicable Legislative Provisions

National Instrument 41-101 General Prospectus Requirements, ss. 14.1(3), 14.2(1)(c)(i).

January 12, 2009

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the "Jurisdiction")

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

STAR HEDGE MANAGERS CORP.

(the "Filer")

AND

BMO NESBITT BURNS INC.

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the "Legislation") for relief from Section 14.1(3) of National Instrument 41-101 ("NI 41-101"), which provides that a manager of an investment fund may not act as a custodian or sub-custodian of the investment fund and from Section 14.2(1)(c)(i) of NI 41-101 that would enable the Filer and other investment funds subject to NI 41-101 that may in the future wish to engage BMO Nesbitt Burns Inc. to serve as a custodian or sub-custodian (the "Additional Funds") to enter into arrangements with BMO Nesbitt Burns Inc. to act as custodian or sub-custodian, as applicable, pursuant to Part 14 of NI 41-101.

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(i) the Ontario Securities Commission is the principal regulator for this application; and

(ii) the Filer has provided notice that section 4.7(1) of Multinational Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in the jurisdictions of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon Territory and Nunavut.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is a mutual fund corporation incorporated under the laws of the Province of Ontario. BMO Nesbitt Burns Inc. (the "Administrator" or "BMO Nesbitt") is the administrator of the Filer. The principal office of the Filer and the Administrator is located at 1 First Canadian Place, 100 King Street West, 3rd Floor, P.O. Box 150, Toronto, Ontario M5X 1H3. The Filer is a reporting issuer and filed a final long form prospectus dated August 28, 2008 (the "Prospectus") in respect of an offering of units, each unit consisting of one Class A Share and one Warrant to purchase one Class A Share.

2. The Administrator is incorporated under the laws of Canada and is an indirect subsidiary of the Bank of Montreal, a bank listed in Schedule 1 of the Bank Act (Canada). The Administrator is a member of IIROC and is registered as an investment dealer (or equivalent) with the securities regulatory authorities in each province and territory of Canada. The Administrator's head office is in Toronto, Ontario. The financial results of BMO Nesbitt are consolidated with those of Bank of Montreal and as such are not reported separately to the public.

3. BMO Nesbitt is subject to regulatory oversight and regulatory capital requirements and accordingly files with the applicable regulators audited financial statements on a regular basis. BMO Nesbitt's most recent audited financial statements for the financial year ended October 31, 2008 indicate shareholders' equity in excess of $10 million.

4. BMO Nesbitt does not meet the requirements of subparagraph 14.2(1)(c)(i) of NI 41-101, as it does not have audited financial statements that have been made public. Otherwise BMO Nesbitt meets all other requirements of NI 41-101 in order to act as a custodian or sub-custodian of investment funds under NI 41-101.

5. The Filer has been created to provide investors with long-term capital growth by investing in a portfolio (the "Portfolio") consisting of private investment funds or portfolios managed by three of Canada's leading portfolio managers: Rohit Sehgal of Dynamic Funds, Eric Sprott of Sprott Asset Management Inc. and Normand Lamarche of Front Street Investment Management Inc. ("Front Street").

6. The Portfolio will initially consist of approximately equal investments in Dynamic Power Hedge Fund managed by Rohit Sehgal (the "Dynamic Fund"), Sprott Hedge Fund L.P. II managed by Eric Sprott (the "Sprott Fund") and a separate account managed by Norman Lamarche (the "Front Street Managed Account"). The Front Street Managed Account will employ investment strategies used by Front Street Resource Hedge Fund Ltd. and Front Street Special Opportunities Canadian Fund Ltd.

7. The Filer has appointed CIBC Mellon Trust Company ("CIBC Mellon") to act as custodian of the portfolio assets, which will include the units of the Dynamic Fund and the Sprott Fund and the securities and assets in the Front Street Managed Account. Front Street as an investment advisor has used the Administrator as its prime broker to facilitate portfolio transactions and if appointed as prime broker the Administrator would hold portfolio assets. To accommodate these arrangements for the Filer, CIBC Mellon as the Filer's custodian may retain the Administrator as one of its sub-custodians so that it may hold the Filer's assets that form part of the Front Street Managed Account.

8. The value of the assets in the Front Street Managed Account will be reflected in the CIBC Mellon account maintained for the Filer. As custodian, CIBC Mellon has the customary standard of care relating to the Filer's property received by it or a sub-custodian and has the other obligations of a custodian under applicable securities laws. The Administrator will cooperate with CIBC Mellon to allow CIBC Mellon to meets its obligations thereunder.

9. The Administrator has referred the arrangements between Front Street and the Administrator as prime broker to the Filer's independent review committee (the "IRC"). The IRC has provided a positive recommendation to the Administrator and will continue to review any arrangements between Front Street and the Administrator as prime broker on an annual basis. In that regard the IRC will obtain a certificate from Front Street setting out the rationale for using the Administrator as prime broker including service, operational and pricing considerations

10. The Filer will disclose that the Administrator acts as prime broker and sub-custodian if that is the case in the Related Party Transactions section of the Filer's management report of fund performance.

11. BMO Nesbitt wishes to have the flexibility to agree to act as a custodian or a sub-custodian for Additional Funds without having to make separate applications for relief.

12. If appointed prime broker to the Filer, the Administrator will give the Filer and its custodian, as applicable, a copy of its audited summary statement of consolidated financial position in respect of the financial year ended October 31, 2008 and will continue to give to the Filer, its custodian, as applicable, and the Additional Funds (including their custodians, as applicable) such audited financial summary upon request to allow those entities to continue to conclude that BMO Nesbitt is qualified under NI 41-101 to act as a custodian or sub-custodian, as the case may be.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that:

(i) the exemption from Section 14.1(3) of NI 41-101 is granted provided that:

A. in the sub-custodian agreement between the Custodian and the Administrator, the Administrator will agree to exercise a custodian's normal standard of care and will be responsible for any loss that arises out of its failure to exercise the standard of care;

B. the Administrator will only act as prime broker for the Filer if Front Street acts as an investment manager to the Filer;

C. the Administrator will cease acting as sub-custodian in the event that Front Street uses another Canadian investment dealer as its principal prime broker for investment strategies used by the Filer;

D. with respect to the Filer's assets held by it as prime broker, the Administrator will only act on trade instructions received from Front Street; and

(ii) the exemption from Section 14.2 (1)(c)(i) is granted to permit the Filer and the Additional Funds to enter into arrangements with BMO Nesbitt to provide custodial services provided that:

A. the relief terminates 10 days following the date that:

(a) a Schedule I Bank ceases to own or control BMO Nesbitt directly or indirectly; or

(b) the shareholders' equity of BMO Nesbitt declines below $10 million;

B. the custodian or sub-custodian agreement, as applicable, between the Filer or any Additional Funds and BMO Nesbitt includes a provision requiring BMO Nesbitt to provide a copy of its audited summary statement of consolidated financial position in respect of its most recently completed financial year to the Filer or any Additional Funds (including their custodians, as applicable) upon request; and

C. the compliance report required by Subsection 14.6(2) of NI 41-101 to be delivered on behalf of the Filer or any Additional Funds, as applicable, includes a statement that:

(a) BMO Nesbitt is acting as custodian or sub-custodian of the Filer or any Additional Funds, as applicable, pursuant to the decision of the Canadian securities administrators; and

(b) the circumstances described in clause (A) above do not exist as of the date of the compliance report.