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. Picking Your First Broker
    Investing Basics

    Picking Your First Broker

  2. Is A Career In Financial Planning In ...
    Professionals

    Is A Career In Financial Planning In ...

  3. Is Your Broker Acting In Your Best Interest?
    Brokers

    Is Your Broker Acting In Your Best Interest?

  4. Is Your Broker Ripping You Off?
    Brokers

    Is Your Broker Ripping You Off?

Hot Definitions
  1. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  2. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  3. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  4. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  5. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  6. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
Trading Center