Five Percent Rule


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.

BREAKING DOWN '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.

  1. Rules Of Fair Practice

    A set of rules and regulations developed by the National Association ...
  2. Commission

    A service charge assessed by a broker or investment advisor in ...
  3. Self-Regulatory Organization - ...

    A non-governmental organization that has the power to create ...
  4. National Association Of Securities ...

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

    1. An individual or firm that charges a fee or commission for ...
  6. Principal-Agent Problem

    The principal-agent problem develops when a principal creates ...
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