Hi,
Thank you for posting in Symantec community.
I would be glad to answer your query.
Question: is the hostfile SONAR referring to is the one on C:\Windows\System32\drivers\etc??
--> Yes, that's the correct location.
or is there any other hostfile location?
--> No, there is not any other hostfile location.
Check this article: Creating an DNS or Host File Change Exception in Symantec Endpoint Protection Manager 12.1 RU1 MP1 and above.
http://www.symantec.com/docs/TECH194108