Front Street Strategic Yield Fund Ltd.

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemption from National Instrument 81-106 Investment Fund Continuous Disclosure to permit investment funds representing two tiers of a two-tiered fund structure that use specified derivatives to calculate their NAV on a weekly basis and not on a daily basis, subject to certain conditions.

Applicable Legislative Provisions

National Instrument 81-106 Investment Fund Continuous Disclosure, ss. 14.2(3)(b) and 17.1.

April 30, 2010

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for relief from the requirement in section 14.2(3)(b) of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) that the net asset value (NAV) of an investment fund must be calculated at least once every business day if the investment fund uses specified derivatives (the Exemption Sought).

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

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

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

Interpretation

Terms defined 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 an investment fund incorporated under the laws of Canada.

2. Front Street Capital 2004 (the Manager) will act as investment fund manager and promoter of the Filer and will manage and direct the business, operations and affairs of the Filer. The Manager will also be responsible for providing or arranging for the provision of all investment advisory and portfolio management services required by the Filer. The head office of the Manager is located in Ontario.

3. The Filer filed a preliminary prospectus (the Preliminary Prospectus) dated March 30, 2010 on SEDAR with respect to a public offering (the Offering) of units (the Units). Each Unit consists of one non-voting equity share of the Filer (an Equity Share) and one transferable warrant of the Filer (a Warrant). Each Warrant entitles the holder to purchase one Equity Share any time on or before 5:00 p.m. (Toronto time) on the date of the first anniversary of the closing date of the Offering (Expiry Date). Warrants not exercised by 5:00 p.m. (Toronto time) on the Expiry Date will be void and of no value. The Equity Shares and Warrants comprising the Units will separate immediately following the earlier of the closing of an over-allotment option granted to a syndicate of agents (the Agents) who conditionally offer the Units for sale, subject to prior sale, on a best efforts basis, and 30 days after the closing date of the Offering, and thereafter may be transferred separately. The over-allotment option provides the Agents the right to purchase additional Units in an amount equal to 15% of the aggregate number of Units issued at the closing of the Offering. A receipt for the Preliminary Prospectus was issued by the Ontario Securities Commission on March 31, 2010. The Offering of the Units is a one-time offering and the Filer will not continuously distribute the Units.

4. The Filer's investment objectives are to: (i) provide holders of Equity Shares (Shareholders) with quarterly tax-advantaged cash distributions, and (ii) to maximize risk adjusted returns to Shareholders, consisting primarily of tax-advantaged distributions, while preserving capital. The Filer will seek to achieve its investment objectives through exposure to a portfolio (the Portfolio) focused primarily on convertible debentures and warrants of Canadian issuers and to a lesser extent on merger arbitrage.

5. The Portfolio will be held by Flatiron Strategic Yield Ltd. (SY Ltd.), an exempted company incorporated with limited liability in the Cayman Islands. Front Street Corporate Management Services Ltd. is the manager and promoter of SY Ltd.

6. SY Ltd. will be established for the purpose of acquiring and holding the Portfolio. It is expected that SY Ltd. will issue Series A notes (Series A Notes) to the Counterparty (defined below) with an aggregate value equal to the net proceeds of the Offering. The Filer will seek to achieve its investment objective by obtaining economic exposure to the Portfolio through one or more forward purchase and sale agreements (collectively, the Forward Agreement) to be entered into with one or more Canadian chartered banks and/or their affiliates (collectively, the Counterparty). The Filer will invest the net proceeds of the Offering in a portfolio of common shares of Canadian public companies (the Common Share Portfolio) acceptable to the Counterparty. Pursuant to the Forward Agreement, the Counterparty will agree to pay to the Filer on the scheduled settlement date of the Forward Agreement (the Forward Termination Date), as the purchase price for the Common Share Portfolio, an amount based on the value of the then outstanding Series A Notes on the Forward Termination Date.

7. To provide liquidity for the Units, an application requesting conditional listing approval has been made on behalf of the Filer to the Toronto Stock Exchange (the TSX).

8. Equity Shares may be redeemed by the Shareholder on any anniversary date of the closing date of the Offering (the Annual Redemption Date) commencing in 2011 (but must be surrendered by the Shareholder at least 20 business days prior to the Annual Redemption Date in order to be redeemed), subject to certain conditions, at a redemption price per Equity Share equal to the net assets of the Filer on a per Equity Share basis (less any costs associated with the redemption, including commissions and other such costs, if any, related to the partial settlement of the Forward Agreement to fund such redemption).

9. In addition to such annual redemption right, Equity Shares may be redeemed on the second last business day of each month, other than in the month of November in 2010, commencing in 2011 (but must be surrendered by the Shareholder on the last business day of the month preceding the redemption month in order to be redeemed), subject to certain conditions, at a redemption price computed by reference to the market price of the Equity Shares on the applicable monthly redemption date (and less any costs associated with the redemption, including brokerage costs).

10. Holders of the Warrants will be entitled to subscribe for one Equity Share and become holders of Equity Shares at any time commencing on the closing date of the Offering and prior to 5:00 p.m. (Toronto time) on the one year anniversary of such closing date. Warrants not exercised prior to 5:00 P.M. (Toronto Time) on the one year anniversary date of the closing date of the Offering will be void.

11. Under section 14.2(3)(b) of NI 81-106, an investment fund that is a reporting issuer that uses or holds specified derivatives, such as the Filer intends to do, must calculate its net asset value on a daily basis.

12. The Filer proposes to calculate the net asset value per Equity Share on the Thursday of each week (or if any Thursday is not a business day, the immediately preceding business day) and the last business day of each month.

13. The Preliminary Prospectus discloses, and the final prospectus of the Filer will disclose, that the net asset value per Equity Share will be calculated and made available to the financial press for publication on a weekly basis. The Manager will post the net asset value per Equity Share, including the date of such calculation, on its website at www.frontstreetcapital.com.

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 the Exemption Sought is granted provided that:

(a) the Equity Shares are listed on the TSX;

(b) the Filer calculates the net asset value per Equity Share at least weekly; and

(c) the final prospectus of the Filer discloses:

(i) that the net asset value per Equity Share is available to the public upon request; and

(ii) a website that the public can access to obtain the net asset value calculation per Equity Share;

for so long as: (i) the Equity Shares are listed on the TSX, and (ii) the Filer calculates the net asset value per Equity Share at least once in each week.