Research and Soft Dollar Policy Template

Research and Soft Dollar Policy: [Firm name]

Written policy for how an investment manager obtains and pays for investment research and brokerage services, and how it uses client commissions. The US part is based on the Section 28(e) safe harbour of the Securities Exchange Act of 1934 (15 U.S.C. 78bb(e)), the SEC interpretive release on client commission practices (Release 34-54165, July 2006), the adviser's fiduciary duty and the soft dollar disclosure in Form ADV Part 2A Item 12. The EU part covers MiFID II (Directive 2014/65/EU Article 24(7) to (9a), as amended by the Listing Act Directive (EU) 2024/2811) and Article 13 of Commission Delegated Directive (EU) 2017/593 as amended by Delegated Directive (EU) 2026/374. UK rules are cited by reference only. The example firms, Kestrel Bay Capital and Kestrel Bay Capital Europe, are fictional. Replace every [bracketed] value and every row marked Example. Obtain the law and guidance for the normative text. This is a document format, not legal, compliance, investment or tax advice.

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Contents

• 1. Purpose and scope · 2. Governance and responsibilities · 3. Payment models by entity · 4. US framework: Section 28(e) safe harbour
• 5. Eligibility decisions and mixed-use allocation · 6. Research budget, broker vote and commission sharing · 7. EU framework: MiFID II research rules · 8. UK framework
• 9. Research quality assessment · 10. Conflicts of interest and controls · 11. Client disclosure and reporting · 12. Monitoring and testing
• 13. Records · 14. Breaches and exceptions · Annex A. Product eligibility request · Annex B. Traceability matrix · Glossary and references · Standard and licence note

1. Purpose and scope

This policy sets how [Firm name] (the "Firm") obtains investment research and brokerage services, how it pays for them, and how it protects clients when client commissions or client charges are used. It applies to all portfolio managers, analysts, traders and staff who request, use, approve or pay for research, and to every client account and fund the Firm manages.

The policy has four aims:

1. Client trades are always placed to achieve best execution. Research is never a reason to accept worse execution.
2. Client money pays only for products and services that help the Firm make investment decisions or execute trades for those clients, and only within the limits of the law that applies to the entity and the client.
3. The cost of research is fair between clients and is disclosed clearly.
4. The Firm can show, from records, how every research payment was decided, valued and allocated.

2. Governance and responsibilities

3. Payment models by entity

Example: Kestrel Bay Capital Europe uses research produced by Kestrel Bay Capital's analysts and some third-party research licensed by the US adviser. The EU entity pays the US adviser an annual research recharge of EUR [amount], set by the Finance team using analyst time spent on EU mandates, so that EU clients do not benefit from research paid with US client commissions without a matching payment. The EU management body reviewed the joint payment option in 2026 and decided to keep paying from own resources; the reasons are recorded in section 7.4.

4. US framework: Section 28(e) safe harbour

4.1 Three-step test

Apply all three steps to each product or service paid with client commissions, and record the result in Annex A.

4.2 Typical eligibility outcomes

4.3 "Provided by" the broker

Research paid with commissions must be provided by the broker-dealer that executes the trade, or by a third party that the broker pays under an arrangement in which the broker takes on the payment obligation. Under a commission sharing arrangement, the executing broker (or a broker that participates in the execution and clearing) pays the research provider from the research component of commissions, and the Firm checks that each payment is for eligible research. The Firm never pays a research provider directly and then asks a broker to reimburse it.

4.4 Making the good-faith determination and paying up

The good-faith determination is the core of the safe harbour, and it is a judgement the Firm must be able to explain afterwards. Make it at two levels. For each broker, compare the all-in commission rate with the execution-only rate available for similar trades, and record the difference as the amount paid up for research. For the research programme as a whole, compare the total paid up (USD 1,300,000 in FY2025) with the value the Research Committee places on what was received, using the broker vote and the quality assessment in section 9. If the Committee cannot say why the research was worth what clients paid for it, the determination is not made in good faith, however complete the paperwork.

Paying up is permitted, not required. It is reasonable where the research is used in managing the accounts that pay for it, where the rate is in line with what comparable managers pay, and where the executing broker still meets the Firm's execution quality thresholds. It is not reasonable where commissions are steered to a broker only to reach a research payment target, where research credits build up without a plan to use them, or where the same research could be bought for much less on a hard-dollar basis. The Committee records its conclusion in its minutes each quarter, with the rates compared and any broker whose rate was challenged.

Common errors: treating the safe harbour as covering all trades (it does not cover most principal trades, so fixed income markups never pay for research under this policy); relying on a broker's description of a product as "research" without reviewing its content; and forgetting that the determination may be made for the Firm's overall responsibilities across discretionary accounts, which then requires the disclosure in Item 12 that research benefits accounts other than those that paid for it.

5. Eligibility decisions and mixed-use allocation

Example (mixed use): the data terminal in RSH-003 costs USD 120,000 a year. The eligible share is 70%, so USD 84,000 is paid through a commission sharing arrangement and USD 36,000 is paid by the Firm from its own resources. Kestrel Bay Capital Europe analysts do not use these licences, so no EU recharge applies to this product.

6. Research budget, broker vote and commission sharing

6.1 Annual budget and actual spend

Check: 1,900,000 + 1,300,000 = 3,200,000, and 836,000 + 380,000 + 84,000 = 1,300,000.

How to set the budget. Start from need, not from commissions. Each autumn, analysts and portfolio managers list the research they expect to use in the next year, by provider and topic, with the reason and the expected cost. The Research Committee compares the total with the prior year's spend and quality scores, removes low-value items, and sets the budget for research paid with client commissions and, separately, the amount the Firm will pay from its own resources. The research component of commission rates is then set so that expected trading at normal turnover will fund the budget; if turnover falls, the Firm does not trade more to fill the gap but either reduces research or pays the difference itself. The FY2026 budget of USD 1,250,000 is lower than the FY2025 spend of USD 1,300,000 because Provider E will not be renewed (USD 90,000) and Provider B moves to a lower tier, offset in part by a new sector service.

Review the budget at mid-year. A forecast overspend needs Committee approval before further payments; a forecast underspend is a signal to review commission rates, not to find new things to buy. Unspent CSA balances at year end (USD 62,000 in FY2025) are carried into the next budget and reduce the research component of rates, so that clients who generated them benefit.

6.2 Broker vote

Rules for the vote:

• every analyst and portfolio manager votes [quarterly] on the value of research received, by provider and topic;
• votes are weighted by assets managed or coverage responsibility, using a method approved by the Research Committee;
• the vote sets research payments; it never sets trading volumes or broker selection, which follow the Best Execution Policy;
• a broker that falls below the Firm's execution quality thresholds stays off the execution list even if analysts value its research.

6.3 Commission sharing arrangement controls

7. EU framework: MiFID II research rules

7.1 Inducement rule

An EU investment firm that provides portfolio management or independent investment advice may not accept and keep fees, commissions or monetary or non-monetary benefits from third parties in relation to that service, except acceptable minor non-monetary benefits (MiFID II Article 24(7) and (8); Delegated Directive 2017/593 Article 12). Research received from a third party is not an inducement only when it is paid for under one of the options in section 7.2.

7.2 Payment options

7.3 Minor non-monetary benefits

7.4 Record of decision on the payment model

Example: On YYYY-MM-DD the management body of Kestrel Bay Capital Europe reviewed option C after national transposition. It kept option A because its research use is modest (budget EUR 450,000 a year), clients value a simple fee structure, and moving to joint payment would require a cost allocation policy, client information and an annual value assessment for little benefit. The decision will be reviewed in [2027] or earlier if the research budget rises above EUR [threshold] or client demand changes.

7.5 How joint payment differs from the earlier research payment account

Before the Listing Act changes, an EU firm that wanted clients to pay for research had to use a research payment account under Article 13 of Delegated Directive 2017/593: a separate research charge agreed with the client, a research budget set by the firm, regular assessment of research quality, and detailed client reporting of budgeted and actual charges. In practice most EU managers found this costly and paid for research themselves. A narrow joint payment exemption for research on small issuers was added in 2021 and later widened.

Option C, as rewritten in Article 24(9a) by Directive (EU) 2024/2811 and reflected in Delegated Directive (EU) 2026/374, lets a firm pay for research and execution together again, for issuers of any size, without a separate research charge to the client. The safeguards move from the client charge to the firm's own governance: the firm must tell clients whether it pays jointly or separately, have a written policy on how joint payments are split between research and execution, and assess the quality, usability and value of the research at least annually. For a firm like Kestrel Bay Capital Europe, choosing option C would mean adopting that policy, aligning it with the US commission sharing arrangements so that one research programme is not paid for twice, and updating client information. National transposition may add conditions (check national transposition), so record the measures relied on in section 3.

8. UK framework

9. Research quality assessment

How to run the assessment. Collect scores from every user of each provider, not only from the person who requested it, and weight them as in the broker vote. Ask for evidence behind high scores: an idea that reached a portfolio, a model that changed, a meeting that altered a view. Compare cost per user and cost per useful item with alternatives and with the previous year. A provider scoring below 50 is not renewed unless the Research Committee records a specific reason, such as sole coverage of a market the Firm invests in. The assessment feeds the budget in section 6 and the good-faith determination in section 4.4.

10. Conflicts of interest and controls

11. Client disclosure and reporting

12. Monitoring and testing

13. Records

14. Breaches and exceptions

Escalate any breach above [USD 10,000] or affecting a registered fund to the CCO within [two] business days, and to the fund board at its next meeting. Where client money paid for something it should not have, the Firm restores the amount to the clients or CSA balance concerned.

Annex A. Product eligibility request

Annex B. Traceability matrix

Glossary and references

Standard and licence note

Based on Section 28(e) of the Securities Exchange Act of 1934, SEC Release 34-54165 and Form ADV Part 2A as published by the SEC (US federal works, public domain), and on Directive 2014/65/EU, Directive (EU) 2024/2811 and Commission Delegated Directives (EU) 2017/593 and 2026/374 as published on EUR-Lex (reuse with acknowledgement). FCA rules and policy statements are cited by reference only and no text from them is used. Conditions are paraphrased in original wording and are not quotations; the payment model comparison and controls are an original structure. Kestrel Bay Capital, Kestrel Bay Capital Europe and all figures are fictional. Check the current US guidance, the consolidated EU texts, national transposition measures and UK rules before use. This is a document format, not legal, compliance, investment or tax advice. Template licence: MIT.