Five Percent Rule

AAA

DEFINITION of 'Five Percent Rule'

A regulation that requires a broker to use fair practices and ethical guidelines when setting the commission rates. The five percent rule stipulates that the broker can change the commission percentage by 5%, either up or down, but can only do so if the change can be legally justified. The rule also applies to other transactions, including proceeds sales and riskless transactions.

INVESTOPEDIA EXPLAINS 'Five Percent Rule'

The five percent rule is one of the rules of fair practice set forth by the National Association of Securities Dealers (NASD), and which must be followed by members of the organization. The rule itself does not set forth any calculation criterion. Instead, it indicates that the broker should follow guidelines. The rule itself has several exceptions.

RELATED TERMS
  1. Commission

    A service charge assessed by a broker or investment advisor in ...
  2. National Association Of Securities ...

    The NASD was a self-regulatory organization of the securities ...
  3. Broker

    1. An individual or firm that charges a fee or commission for ...
  4. Self-Regulatory Organization - ...

    A non-governmental organization that has the power to create ...
  5. Rules Of Fair Practice

    A set of rules and regulations developed by the National Association ...
  6. Duty Of Loyalty

    A director's responsibility to act at all times in the best interests ...
Related Articles
  1. Investing Basics

    Picking Your First Broker

    If you're a rookie investor, your first big investment decision should be an informed one.
  2. Professionals

    Is A Career In Financial Planning In Your Future?

    Take our quiz to find out whether you're suited for this line of work.
  3. Brokers

    Is Your Broker Acting In Your Best Interest?

    Learn the clues you'll need to determine whether you've chosen a reputable professional.
  4. Brokers

    Is Your Broker Ripping You Off?

    We show you how to resolve a problem without getting the lawyers involved.
  5. Options & Futures

    Tips For Resolving Disputes With Your Financial Advisor

    Before you blame your advisor for your losses, be sure you know your rights and responsibilities.
  6. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.
    Professionals

    What is a SWOT Analysis?

    SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. SWOT analysis is a management tool used to identify strategies for success. It may be used to guide individual thinking, group ...
  7. Investing

    What are Business Ethics?

    Business ethics is the system of laws and guidelines by which business professionals and corporations operate in a fair, legal and moral fashion. It’s a broad topic, covering everything from ...
  8. What's a monopoly?
    Economics

    How a Monopoly Works

    In economics, a monopoly occurs when one company is the sole (or nearly sole) provider of a good or service within an industry. This potentially allows that company to become powerful enough ...
  9. Investing

    What's the difference between legal defalcation and illegal defalcation?

    Discover what is meant by the term ''defalcation'' and how it can be used in multiple contexts to describe illegal or legal activities.
  10. Corporate Social Responsibility refers to a code of conduct.
    Investing Basics

    What is Corporate Social Responsibility?

    Corporate Social Responsibility refers to a code of conduct and action beyond what is required by laws, regulations and trade rules.

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center