Kestrel Best Execution Policy

**Owner:** Best Execution Committee **Approver:** Chief Compliance Officer **Annual review:** Required; next review September 2026.

1. Purpose

This Policy establishes Kestrel Securities' framework for satisfying its best-execution obligation under FINRA Rule 5310 and, where applicable, the analogous standards of MSRB Rule G-18 (debt securities subject to MSRB jurisdiction). It is a controlled implementation document; the operating procedures are detailed in the equities, options, and fixed-income WSPs (`Kestrel-WSP-Equities`, `Kestrel-WSP-Options`, `Kestrel-WSP-FixedIncome`).

This Policy was rewritten in 2025 in response to a 2024 FINRA exam finding regarding the depth and documentation of the firm's regular and rigorous review process. See also `Kestrel-FINRA-Exam-Letter-2025` and `Kestrel-Best-Ex-Committee-Minutes-Q1-2026`.

2. The best-execution standard

Kestrel uses reasonable diligence to ascertain the best market for the subject security and to buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions, satisfying the standard articulated in FINRA Rule 5310(a). Factors considered include:

1. The character of the market for the security (price, volatility, relative liquidity); 2. The size and type of transaction; 3. The number of markets checked; 4. Accessibility of the quotation; 5. The terms and conditions of the order; and 6. The existence and economics of any payment-for-order-flow, internalization, or affiliated-routing arrangement.

Factor 6 is treated as an explicit best-execution factor at Kestrel, even though it is not enumerated as such in Rule 5310(a) itself, because the Best Execution Committee has determined that the firm's two PFOF arrangements warrant heightened analytical attention.

3. The Best Execution Committee

3.1 Membership

- **Chair:** Chief Compliance Officer (independent of the trading function) - **Members:** - Head of Equities Trading - Head of Options Trading - Head of Fixed-Income Trading - Head of Operations - Equities Desk Compliance Officer (EDCO) - General Counsel (or designee) - Independent Quantitative Reviewer (an external consultant engaged under the 2025 remediation plan)

The chair was changed from the Head of Equities Trading to the CCO effective September 15, 2025, to address the structural conflict identified in the 2024 FINRA exam.

3.2 Cadence

- **Monthly monitoring meetings** — review of routing-quality monitoring dashboards by the EDCO and the Independent Quantitative Reviewer. - **Quarterly committee meetings** — full committee meets to perform the regular and rigorous review under FINRA Rule 5310 Supplementary Material .02. - **Ad-hoc meetings** — convened by the chair in response to material changes (e.g., new venue, change in PFOF tier structure, material deterioration in execution quality at any venue).

4. Regular and rigorous review

4.1 Scope

The quarterly review encompasses the universe of venues to which Kestrel routed customer orders during the quarter, including:

- Wholesale market makers (NMS equities and options held retail market and marketable-limit flow); - Exchange order routers and ATSes; - Affiliated routing destinations (none currently — Kestrel does not have an affiliated market maker; this fact is reaffirmed each quarter).

4.2 Order-type and order-size segmentation

Per FINRA Rule 5310 Supplementary Material .02, the review is conducted on a security-by-security, type-of-order, and order-size basis. The EDCO produces a pre-meeting analytics pack containing, at minimum:

- Per-venue, per-order-type, per-order-size statistics on price improvement, dis-improvement, effective and realized spreads, speed of execution, and fill rate; - Per-venue NBBO comparison: percentage of marketable orders executed at, better than, and worse than the NBBO at order receipt; - Per-venue concentration ratios for Kestrel order flow as a percentage of the venue's overall flow; - Quarter-over-quarter trends in each metric, with deviations exceeding the alert thresholds in §4.4 specifically called out.

4.3 PFOF reconciliation

The Operations group provides the committee with a quarterly PFOF reconciliation showing:

- Total payment received from each PFOF venue; - Routed share volume to each PFOF venue; - Computed payment-per-100-shares; - A comparison of routing-share allocation to execution-quality ranking, designed to surface any divergence between routing decisions and execution-quality outcomes.

4.4 Alert thresholds

The following thresholds trigger an enhanced review and a documented written rationale for continued use of the affected venue:

- **Material PI deterioration**: a quarter-over-quarter decline in per-share price improvement of >25%, or four consecutive quarters of decline of any magnitude; - **NBBO worsening**: an increase in the share of marketable orders filled at a price worse than the NBBO at receipt of >10 bp quarter-over-quarter; - **Concentration**: routing share to any single venue >55% of total retail held flow in a category.

When any threshold is triggered, the committee must either reduce routing to the affected venue or document, in the committee minutes, a substantive rationale for not doing so.

4.5 Documentation

Committee minutes must capture:

- Attendance and agenda; - The data reviewed (with hyperlinks or attachments to the analytics pack); - Findings and conclusions, including any thresholds breached; - Decisions taken (including any changes to routing tables, venue ratings, or policies); - Action items with owners and due dates; - Approval and sign-off by the Chair.

Minutes are circulated within 10 business days of the meeting and preserved in accordance with 17 CFR 240.17a-4.

5. Customer-directed orders

Customer-directed orders are routed only to the customer-specified venue. Such orders are not subject to the routing-decision component of the best-execution analysis but remain subject to the firm's general duty under FINRA Rule 5310 to handle the order with reasonable care.

6. Reporting

6.1 Internal reporting

The Best Execution Committee reports quarterly to the Audit Committee of the Board, with a written summary of the quarter's review, threshold breaches, and any changes in routing.

6.2 External disclosures

- The firm's quarterly Rule 606(a) public report is generated by an external vendor and validated by Operations against internal order logs (`Kestrel-WSP-Equities` §4 and 17 CFR 242.605-606). - Customer-specific Rule 606(b)(1) reports are produced on request by Customer Service, with a target turnaround of three business days (the rule allows seven). - The "material aspects" disclosure in the public Rule 606(a) report describing PFOF economics is reviewed annually by the General Counsel, and updated immediately upon any material change in PFOF tier structure or rebate formula.

7. References

- FINRA Rule 5310 (`FINRA-Rule-5310`) - 17 CFR 242.605 and 242.606 (`17 CFR 242.605-606`) - Proposed SEC Regulation Best Execution (`SEC-Release-34-96496`) — monitored but not yet implemented. - 17 CFR 240.15l-1 (Reg BI; relevant for recommendation-driven order flow) (`17 CFR 240.15l-1`) - FINRA AWC representative example (`FINRA-AWC-2023056789201`) - Kestrel-WSP-Equities - Kestrel-FINRA-Exam-Letter-2025 - Kestrel-Best-Ex-Committee-Minutes-Q1-2026