Kestrel Trade Error Correction Policy

**Owner:** Head of Operations **Approver:** Chief Financial Officer and Chief Compliance Officer **Applies to:** All Kestrel Securities and Kestrel Advisors personnel whose activity may give rise to a trade error.

1. Purpose

This Policy establishes the definition of a trade error, the process for reporting, investigating, and correcting errors, the use of the Error Account, and the principles applied to making customers and advisory clients whole.

The Policy is designed to satisfy Kestrel's obligations under the federal fiduciary standard of 15 U.S.C. § 80b-6 (for the advisory side), the broker-dealer duty of fair dealing embedded in FINRA Rule 2010, the books-and-records requirements of 17 CFR 240.17a-3 and 17 CFR 240.17a-4, and the customer-protection framework of 17 CFR 240.15c3-3.

2. Definition of a trade error

A trade error is any deviation from a customer's or client's instructions, from an adviser's investment decision, or from the firm's own trading intent, whether caused by human mistake, system failure, miscommunication, or counterparty action. Common error categories:

- Wrong security (symbol transposition); - Wrong side (buy vs. sell); - Wrong quantity; - Wrong account; - Wrong allocation schedule (Kestrel Advisors model-portfolio rebalancing errors); - Failed compliance check override (erroneously approved restricted- list trade, erroneously released short without locate, etc.); - Execution outside a customer's price or time instruction.

Ordinary market-risk losses resulting from legitimate execution are **not** trade errors. Nor are customer-driven changes of heart post- execution. Where ambiguity exists about whether an event is an error, the matter is escalated for disposition by the Error Review Committee (§6).

3. Prohibited practices

- No post-trade re-allocation of a block order absent written CCO approval; block allocations must be scheduled pre-trade. This prohibition applies equally to Kestrel Advisors and Kestrel Securities. - No netting of errors across unrelated customers. If an error favors Customer A and disfavors Customer B, Customer B is made whole via the firm's Error Account; gains accruing to Customer A are handled under §5. - No deliberate structuring of transactions to move profits between the Error Account and firm proprietary accounts.

4. Reporting and escalation

Any employee who becomes aware of a potential error must report it to their supervisor and to Operations within two hours of discovery. Operations logs the error in the Error Log, with timestamps, parties, the security, the face amount, and an initial root-cause hypothesis.

Material errors — defined as errors resulting in a cash P&L impact greater than $25,000 or involving a regulatory sensitive issue (e.g., a restricted-list breach, a failed market-access control, a short sale without locate) — are escalated same-day to the CCO, the CRO, and the Head of Operations. A material-error incident memo is prepared within one business day and distributed to the Error Review Committee.

5. Error correction mechanics

5.1 The Error Account

The firm maintains a single Error Account on its books. The Error Account absorbs losses associated with correcting errors; gains arising in the Error Account are used first to offset losses in accordance with this Policy and are not paid to employees.

5.2 Customer-favorable errors

If an error results in a benefit to the customer (e.g., the customer received a better price than intended), the benefit is left with the customer. The firm does not take the gain into the Error Account.

5.3 Customer-unfavorable errors

If an error results in a cost to the customer, the customer is made whole:

1. For price-based errors, the customer is credited with the difference between the price received and the price that would have resulted from the correct execution; 2. For quantity-based errors, the customer's position is adjusted to the correct quantity, and any associated P&L is allocated between the customer and the Error Account in accordance with §5.4; 3. For wrong-account errors, the trade is journaled from the incorrect account to the intended account as of the original trade date, with any price impact absorbed by the Error Account.

5.4 P&L allocation

Where an error correction generates P&L (favorable or unfavorable), the P&L is allocated as follows:

- Amounts necessary to make the affected customer whole are allocated to the customer; - Any residual P&L is absorbed by the Error Account; - Gains accruing in the Error Account during a quarter are applied to offset losses; net positive Error Account balances accumulate internally and do not flow to any trading unit or proprietary account.

5.5 Advisory-side allocation errors

For Kestrel Advisors, allocation errors that disadvantage a client are corrected by moving the advantaged executions or by delivering a cash equivalent, consistent with the fiduciary duty under 15 U.S.C. § 80b-6. Allocation errors between advisory clients and non-advisory customers (rare) are corrected in accordance with §§5.1–5.4, with additional SEC disclosure considerations reviewed by the General Counsel.

6. Error Review Committee

6.1 Membership

- Chief Compliance Officer (chair) - Chief Financial Officer - Head of Operations - Chief Risk Officer - Kestrel Advisors CCO (for advisory-side errors)

6.2 Responsibilities

- Review every material error within five business days of occurrence; - Approve the proposed correction and any customer compensation; - Require a root-cause analysis and a remediation plan for any error attributable to a systemic or process failure; - Track remediation to closure.

The Committee meets ad hoc as needed and produces a quarterly aggregate report to the Audit Committee summarizing errors, their dollar impact, root-cause categories, and remediation status.

7. Recordkeeping and regulatory reporting

- The Error Log, incident memoranda, Committee minutes, and root- cause and remediation documentation are preserved under 17 CFR 240.17a-4 for at least six years for customer-impact records and at least three years for supervisory review records. - Books and records adjustments are processed consistent with 17 CFR 240.17a-3 order-memorandum and blotter requirements. - Errors resulting in market conduct concerns (e.g., potential wash trades or spoofing) are reported through the insider-trading and surveillance framework in `Kestrel-Information-Barriers` and, if warranted, via SAR-SF under `Kestrel-AML-Program` (31 CFR 1023.320).

8. Training

All Operations personnel and trading desk supervisors complete annual error-handling training. Training covers this Policy, the prohibited practices in §3, and the escalation flow in §4.

9. References

- 17 CFR 240.17a-3 and 17 CFR 240.17a-4 (`17 CFR 240.17a-3, 240.17a-4, 240.15c3-5`) - 17 CFR 240.15c3-3 (`17 CFR 240.15c3-1, 240.15c3-3`) - 15 U.S.C. § 80b-6 (`15 USC 80b-6 / 17 CFR 275.204A-1`) - 31 CFR 1023.320 (`31 CFR Part 1023`) - FINRA Rule 3110 (`FINRA-Rule-3110-3130`) - Kestrel-WSP-Equities - Kestrel-AML-Program - Kestrel-Information-Barriers