FINRA Routine Examination — Exit Letter (Kestrel Securities, 2025 cycle)

**To:** CEO, Kestrel Securities, LLC **From:** Examiner in Charge, FINRA Department of Member Supervision, New York Regional Office **Date:** March 28, 2025 **Exam No.:** (internal reference on file)

> This document is a reconstruction of the FINRA 2025 routine exam exit > letter as received by Kestrel, capturing the two open findings that > animate the current remediation program. It is included in the > corpus as an example of an operational artefact that references > specific external regulations by their `citation_id`.

1. Overview

FINRA's Department of Member Supervision conducted a routine cycle examination of Kestrel Securities during Q4 2024 and January 2025. The examination scope covered the firm's equities business, supervisory system, financial and operational controls, and written supervisory procedures. Off-cycle examinations of Kestrel's AML program and custody posture occurred under separate workstreams.

FINRA staff appreciates the cooperation of Kestrel personnel during the examination. Two findings are identified below. Kestrel is requested to provide a written response within 30 calendar days of this letter, including a remediation plan with owners and milestone dates for each finding.

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2. Finding 1 — Rule 5310 Regular and Rigorous Review

Rule reference - FINRA Rule 5310 (`FINRA-Rule-5310`), including Supplementary Material .02 (Regular and Rigorous Review) - FINRA Rule 3110 (`FINRA-Rule-3110-3130`) — supervisory system

Finding

Staff observed that Kestrel's regular and rigorous review of the execution quality of the venues to which it routes retail customer order flow does not, in its current form, satisfy the requirements of FINRA Rule 5310 Supplementary Material .02. Specifically:

(a) The Best Execution Committee's quarterly review during the Relevant Period consisted primarily of the review of aggregate Rule 605 statistics published by the receiving venues (`17 CFR 242.605-606`). The review did not analyze execution quality on a security-by-security, order-type-by-order-type, and order-size-by-order-size basis as contemplated by Supplementary Material .02.

(b) The review did not independently evaluate price improvement or price dis-improvement against the NBBO at order receipt for Kestrel's own customer order flow, relying instead on the receiving venue's aggregate statistics.

(c) The review did not substantively evaluate whether the firm's payment-for-order-flow arrangements with two wholesale market makers influenced routing decisions, notwithstanding that the firm routes a majority of its retail market-order flow to those two venues.

(d) Written committee minutes for the Relevant Period do not record the substantive considerations undertaken or the conclusions reached by the committee, and in most cases state only that the venues were "providing acceptable execution quality."

(e) Structurally, the Best Execution Committee was chaired during the Relevant Period by the Head of Equities Trading, who also held primary responsibility for negotiating the firm's PFOF arrangements.

Rule citation (for Kestrel's response)

This finding relates to FINRA Rules 5310 and 3110; the applicable operative language is in Rule 5310 Supplementary Material .02 and .07. The related recordkeeping obligation arises under 17 CFR 240.17a-4 (`17 CFR 240.17a-3, 240.17a-4, 240.15c3-5`).

Requested response

The firm's response should:

- Describe the revisions to the Best Execution Committee's process that will ensure compliance with Supplementary Material .02, including the specific execution-quality metrics that will be reviewed for Kestrel's own order flow; - Address the structural conflict identified in (e), including any change in the committee chair and any segregation of the committee function from the PFOF negotiation function; - Describe the firm's plan for documenting committee findings and conclusions going forward; and - Provide a remediation timeline, including milestones for the first post-remediation committee meeting and for any restatement or amendment of the firm's public Rule 606 disclosures to the extent affected.

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3. Finding 2 — Email Supervision Sampling Under FINRA Rule 3110

Rule reference - FINRA Rule 3110 (`FINRA-Rule-3110-3130`) - 17 CFR 240.17a-4 (`17 CFR 240.17a-3, 240.17a-4, 240.15c3-5`)

Finding

Staff observed that Kestrel's email supervision program does not, in its current form, reasonably surface communications that warrant principal review. Specifically:

(a) The firm's vendor-supplied surveillance tool is configured with a keyword lexicon that has not been materially updated since 2021. Terms now in common use — including terms specific to crypto-asset retail interest, to social-media-driven trading concentrations, and to AI-generated communications — are not in the lexicon.

(b) The random-sample review of unflagged emails has, during the Relevant Period, been performed at a rate of approximately 1% of outbound emails rather than the 3% rate specified in the firm's written supervisory procedures. Random sampling is the principal compensating control for the known limitations of keyword-based surveillance, and the observed sampling rate is insufficient.

(c) Supervisory review dispositions in the tool are not dated with the disposition timestamp; only the lot creation date is captured.

Rule citation (for Kestrel's response)

This finding relates to FINRA Rule 3110(a) (supervisory system) and 3110(b) (written supervisory procedures), with an underlying recordkeeping deficiency under 17 CFR 240.17a-4(f) for which the firm is on the audit-trail alternative.

Requested response

The firm's response should:

- Describe the refresh of the keyword lexicon, including the source of new terms and the periodicity at which the lexicon will be updated going forward; - Commit to a random-sample review rate consistent with the firm's WSPs, and describe how the rate will be monitored; - Confirm the vendor enhancement (or the system migration) that will capture a separate timestamp for each supervisory review disposition; - Provide a remediation timeline with milestone dates.

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4. Other observations (non-findings)

Staff noted the following items as observations rather than findings. No response is required; the firm may wish to consider them in the course of regular governance review:

- The firm's Rule 3110(c) branch-office inspection cadence is at or near the three-year default; as transaction volumes grow, a more frequent cadence at the Chicago and San Francisco locations may be appropriate. - The firm's Reg SHO locate log (`17 CFR 242.200-204`, `Kestrel-Reg-SHO-Locate-Policy`) satisfies the documentation requirement but does not capture the time elapsed between the locate request and the locate confirmation. Staff did not identify any deficiency in the locate process itself; this is offered only as a process-quality suggestion. - The firm's Reg BI conflicts inventory (`17 CFR 240.15l-1`, `Kestrel-Reg-BI-Disclosure-Procedures`) is comprehensive; staff suggests that a brief narrative description of the mitigation mechanism for each mitigated conflict would aid the firm's supervisory principals in reviewing representatives' behavior.

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5. Next steps

Kestrel is asked to provide its written response to the two findings above within 30 calendar days of the date of this letter. Staff is available to discuss the findings; please direct questions to the Examiner in Charge identified at the top of this letter.

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Kestrel internal disposition notes

The CCO opened internal remediation projects for both findings on March 31, 2025. Project status is tracked in the FINRA 2025 Exam Remediation file and reported monthly to the CEO and quarterly to the Audit Committee.

Finding 1 remediation drove the September 2025 rewrite of `Kestrel-Best-Execution-Policy` and the August 2025 engagement of an external Independent Quantitative Reviewer to participate in the Best Execution Committee's monthly monitoring and quarterly review process. Remediation progress is documented in `Kestrel-Best-Ex-Committee-Minutes-Q1-2026`.

Finding 2 remediation drove the Q3 2025 refresh of the email surveillance keyword lexicon (quarterly refresh cadence established), the restoration of the 3% random sample rate per WSP effective August 2025, and the vendor enhancement to capture per-disposition timestamps delivered in November 2025. Compensating-control documentation and the audit-trail representation under 17 CFR 240.17a-4(f) were updated accordingly.

Regulators: correspondence tracked in the Kestrel regulatory correspondence index; a closing letter from FINRA is anticipated in Q2 2026 pending review of Q1 2026 post-remediation evidence.