By Zachary Schefer

In law school we learn that there are in fact two types of courts. There are courts of law, which apply black letter rules and precedent from prior cases, and there are courts of equity: courts that rule based on fairness.

The distinction arose in England, where the early equity courts were called chancery courts. These courts applied principles of justice and fairness: if a court of law delivered a result that was unfair or unjust, courts of equity could step in and mitigate harsh outcomes. The two types of courts operated independently.

Today’s courts are mostly courts of law, although there are some hybrids. Family courts, for instance, are influenced by principles of equity. Family court judges often consider what is in the best interest of affected children. They have considerable leeway to decide issues based on what they believe will be fairest for any involved child. Still, today’s family courts are bound by the law and precedent.

FINRA arbitration, on the other hand, is a true forum of equity. Arbitrators are not bound by substantive law, strict rules of procedure governing litigation, or the Federal Rules of Evidence. Arbitrators can consider any evidence they deem relevant or material. Further, they are not hamstrung by precedent: if a prior court ruled in a way that seems unjust, an arbitrator can ignore that decision and rule to achieve fairness.

In addition, arbitrators in FINRA cases rarely reward 100 percent of compensatory damages requested. For example, in 2016, claimants won about 50 percent of their requested damages on average. In addition, when claimants were represented by counsel, the claimant won some amount of damages more than 50 percent of the time. This middle-ground approach to damages reflects the reality that rarely do arbitrators believe that one party is 100 percent at fault. A party’s case won’t be made or broken based on a legal technicality; a panel of arbitrators will look at all relevant evidence and do their best to find a just result.

Critics of arbitration argue that industry-friendly arbitrators skew rewards in favor of financial firms, but FINRA’s changes to the arbitrator selection process have attempted to mitigate this issue. One study indicated that industry-friendly arbitrators were about 40 percent more likely to be selected for any given case prior to 2007. The study concluded that the likelihood industry-friendly arbitrators would be appointed decreased significantly after FINRA reduced the number of arbitrators that either party could strike in 2007. Since then, FINRA has also added an option for parties to select an all-public arbitration panel that does not include an arbitrator with ties to the industry.

Director of FINRA Media Relations Michelle Ong emphasizes that “FINRA strives to provide a fair and efficient venue to resolve securities-related disputes.”