1. Introduction

The Investment Industry Regulatory Organization of Canada (IIROC) retains the Canadian Securities Institute (CSI) to provide regulatory proficiency services with respect to the licensing of IIROC Approved Persons.  CSI provides licensing courses and examinations pursuant to a service level and course agreement (the Agreement) that will expire in January 2016.

IIROC seeks to evaluate whether the existing proficiency assurance model or another

approach best serves the public interest and meets IIROC’s regulatory needs as well as the industry’s needs going forward.  The objective of this consultation paper is to engage the industry and other stakeholders on this topic and elicit input at early stages to inform IIROC’s consideration of the existing system and possible alternative arrangements, prior to expiry of the Agreement.  IIROC wishes to inform its analysis with feedback and information relating to, but not limited to:

• the experience of Dealer Members and their affiliates under the IIROC proficiency assurance model and other proficiency assurance models;
• views regarding criteria upon which to evaluate a proficiency assurance model and service providers; and
• observations relating to the nature of the IIROC proficiency market (i.e., the market for education and testing services) and the relevance and viability of various alternatives.

IIROC is of the view that high proficiency standards play a key role in investor protection and the integrity and efficiency of capital markets.  IIROC, accordingly, maintains high proficiency standards and a robust proficiency regime.

As IIROC and the membership enter the next phase of the evolution of the IIROC proficiency assurance model, IIROC will continue to work to optimize proficiency of license holders and ensure the highest levels of professionalism in the industry.

The material in this consultation paper is organized as follows:

1. Introduction
2. Background relating to the relationship between IIROC and CSI
3. IIROC’s existing proficiency assurance system
4. Service Provider Evaluation Criteria
5. Benchmarking – Selected Models
   1. Financial Industry Regulatory Authority (FINRA)
   2. Financial Conduct Authority (FCA)
   3. Canadian Insurance Sales – LLQP
   4. Canadian Securities Administrators (CSA)
   5. Model matrix and comparison of volumes
6. Consideration of Alternatives
7. The Next Phase
8. Consultation Questions
9. Attachements
   Appendix A – IIROC Enrolments in CSI Regulatory Courses 2013
   Appendix B – Enrolments in CSI Courses 2013
   Annex A – History of IIROC’s relationship with CSI and the Agreement
   Schedule 1 – Regulatory courses subject to the Agreement
   Schedule 2 – Historical CSI pricing (retail and IIROC) of regulatory courses
   Schedule 3 – Historical total and IIROC enrolments in regulatory courses
   Schedule 4 – Quality and service standards under the Agreement

Dealer Members, individual license holders and other interested parties are requested to provide comments on the matters discussed in this consultation paper and the questions posed in section VIII Consultation Questions.  Comments should be made in writing and delivered by November 17, 2014.

Comments may be delivered via mail, fax or email by November 17, 2014 to:

Sonia Keshwar
Senior Counsel, Registration
Investment Industry Regulatory Organization of Canada
121 King Street West, Suite 2000
Toronto, Ontario M5H 3T9
Fax: 416-364-9177
Email: [email protected]

Those submitting comment letters should be aware that a copy of each comment letter will be made publicly available on the IIROC website (www.iiroc.ca under the heading “IIROC Rulebook – Dealer Member Rules – Proposed Policy”).

2. Background

CSI was created in 1970 by one of IIROC’s predecessor organizations, the Investment Dealers Association (IDA), and the Canadian stock exchanges to educate and test the proficiency of individuals entering the industry.  In 2002, CSI converted to a for-profit corporation with the IDA as its sole shareholder.  The IDA sold CSI to ONCAP II, LP (a private equity fund managed by ONCAP Management Partners) for net proceeds of approximately $57 million in 2005 following a targeted auction.  $28.5 million of those proceeds were applied as a membership fee reduction distributed to the IDA membership over two years.  $28 million of the proceeds were applied to fund the creation of the Investment Industry Association of Canada.1

As part of the sale of CSI, IIROC and CSI entered into the Agreement engaging CSI as the exclusive course provider for IIROC regulatory courses.  The Agreement was comprised of two five-year terms.  CSI had an option to renew the agreement after the first five years, subject to certain conditions.  CSI exercised the renewal option and IIROC negotiated new pricing terms and caps, and certain price freezes, for the renewal period.2

As noted above, the term of the Agreement ends in January 2016.

Annex A of this consultation paper details provisions of the Agreement, together with pricing and enrolment statistics.

1. The Existing IIROC Model

The goal of any proficiency assurance system is to ensure that appropriate minimum proficiency standards are met by all licensees.  Historically, IIROC has focused on education as well as testing of knowledge and has viewed the proficiency course and examination components as linked.  IIROC has engaged CSI to (i) provide courses, (ii) create examinations, and (iii) administer examinations to prospective licensees. 

The course provider aspect of the role begins with preparation by CSI of competency profiles.  Competency profiles are lists of tasks and capabilities required of each approval category or licensed position.  CSI and its advisory team prepare course material to ensure that each competency is taught and/or covered in the material for the particular licensing category.  CSI staff must remain current as to regulatory developments and issues.  IIROC exercises certain oversight with respect to course preparation, revision and updating. 

Exam blueprints are created to outline appropriate coverage and weighting of material based on the competency profiles.  Examinations are then created by examination developers with specific expertise in the preparation of fair, valid, and reliable exams.    

Psychometric data and principles are applied in ongoing review of examinations.  CSI reviews examination results to ensure currency, statistical validity, fairness and accuracy across versions of examinations (i.e., different combinations of questions from the test bank and different language versions).  CSI also tracks performance in respect of individual test questions to gauge fairness and consistency.  This psychometric analysis is conducted in accordance with international standards.

Exam administration functions include proctoring of exams, evaluation of exams and administration of results and records for IIROC and students.  Examinations must be widely accessible to students in various locations with various needs and must be available in English and French.  CSI currently operates 65 examination centres across Canada.  CSI also proctors exams in other locations on request and payment of a fee.  In 2013, CSI conducted, on average, 15 exam sessions, accommodating nearly 200 exam writers, each business day.

CSI is bound by quality, service, pricing and reporting standards and metrics.  IIROC supervises the work of CSI through various formal and informal reporting and review mechanisms.  CSI delivers to IIROC an annual self-assessment reporting on its performance under the Agreement.  CSI also delivers reports and presentations to IIROC advisory committees.  IIROC advisory committees have been involved in the review of competency profiles and certain course revisions.  CSI reports changes in curricula and exam blueprints to IIROC Staff.

CSI collaborates with IIROC on IIROC proficiency initiatives, as and when they arise.  IIROC is currently engaged, for example, in a significant initiative to improve proficiency training for Approved Persons who operate within the institutional segment of the Canadian capital markets.  IIROC Staff is directly involved in review of the competency profiles and course revisions in connection with such projects.

1. Service Provider Evaluation Criteria

A prospective provider of education and/or testing services under the IIROC proficiency regime should be assessed using defined criteria.  Some suggested criteria are set out below.3

IIROC would expect providers to possess and demonstrate the following:

Regulatory sensitivity

• a high degree of regulatory sensitivity and understanding of regulatory imperatives and concerns; this sensitivity should be applied in the presentation and tone of course material, marketing and communications material, as well as the provider’s dealings with IIROC advisory committees;

Expertise

• educational/pedagogical expertise;  the provider should effectively employ a variety of pedagogical techniques and resources, as well as different technologies, to address different learning styles and preferences;
• involvement of regulatory subject matter experts  in preparing, and maintaining the currency of, course and examination material;
• expertise and procedures to provide robust, fair and consistent testing of required knowledge;

Accessibility

• the capacity to make IIROC regulatory courses and examinations widely available to students across Canada;
• the ability to provide IIROC regulatory courses and examinations in French4 and English;
• the capacity to offer flexible examination scheduling with respect to frequency, timing and location of sittings;

Cost-value proposition

• adequate resources and the ability to render course and examination services on a cost-effective basis;

Examination providers – administration

• procedures to ensure security of the bank of test questions and, in the case of a provider which offers both course and examination or other services, implementation of ethical walls between or among certain of those functions and conflicts of interest policies if appropriate, and
• the appropriate infrastructure to administer results and records and facilitate IIROC and student access to records.

1. Benchmarking – Selected Models

There are a number of proficiency assurance models used by regulators.  Review of benchmark models can inform the analysis and discussion of alternative options for consideration.

1. Financial Industry Regulatory Authority (FINRA) – US

FINRA assumes responsibility for the development and administration of its examinations.  FINRA does not impose any course requirements.  It publishes content outlines to indicate what material and concepts will be tested. The content outline provides a list of competencies, knowledge requirements and legislation and rules that the candidate must learn.  Proctoring of the exams is outsourced.

FINRA engages and oversees industry committees that assist in the development and updating of job analyses (competency profiles), exam questions and content outlines.  The committees meet quarterly and are comprised of volunteers that are appointed by FINRA.  FINRA undertakes an annual evaluation process to determine each committee member’s contributions and level of participation.  Members with poor performance are asked to step down from the committee.  The committees are overseen and supported by ten to twelve employees in FINRA’s Testing and Continuing Education department.

While FINRA imposes no course requirements, there is a market for training providers to create study materials and develop courses for candidates seeking instruction and exam preparation.  Some larger member firms also provide in-house training programs to prepare their employees for the exams.

In order to write a FINRA exam, an individual must be sponsored by a sponsoring organization, such as a member firm.  Exams are written at testing centres operated by Pearson VUE and Prometric. 

FINRA uses its proprietary “PROCTOR” computerized system to administer its exams. When a candidate has been screened and an exam scheduled, the PROCTOR system chooses the questions from FINRA’s test bank according to test specifications for the exam. The set of questions for each candidate is different; however, the system automatically tracks the difficulty level of each question and enforces selection criteria that will ensure that each candidate receives an exam of comparable difficulty that meets the content specifications. The system puts the set of questions into a “session package”, which is securely and electronically disseminated to the test centre. The session package is decrypted by the system and delivered to the candidate’s computer so that only the candidate can access it.  Pearson VUE and Prometric cannot access the exams.  FINRA’s system scores the exam and provides an unofficial score to the exam taker on the computer screen as soon as he or she completes the exam. FINRA posts the official score on the Web CRD system within two business days.

FINRA’s Testing and Continuing Education department is responsible for oversight of FINRA exams and continuing education requirements and is comprised of approximately fifty individuals.

1. Financial Conduct Authority (FCA) – UK

The FCA imposes an ongoing general competency requirement (the “competent employees rule”) on all approved persons.   FCA firms must continually assess the competence of employees.  The FCA reviews the systems and procedures that firms put in place to comply with these requirements.

The FCA has more detailed requirements for certain retail activities5 , including the need to attain a qualification where relevant.  For retail investment advisers, these include qualification, continuing professional development and assessment of competence requirements.  The qualification requirements are set out in a table of qualifications itemizing the qualifications that are required in order to conduct enumerated activities. 

Qualification providers and the qualifications they offer must be evaluated and approved by the FCA in accordance with criteria developed by the FCA.  Qualifications include certificates, courses, designations, degrees, diplomas, etc.

In assessing qualification providers, FCA staff considers whether the applicant provider has robust and reliable procedures for assessing examinations, governance preventing conflicts of interest and adequate financial resources, among other criteria.  The FCA has approved 546 qualification providers to date. 

The FCA sets examination standards to determine if qualifications or courses should be recognized.  The examination standards set out required content and learning outcomes.  Qualification providers seeking approval of a qualification must submit a mapping document that demonstrates that the syllabus or course content appropriately addresses the FCA standards.  There is a quarterly public consultation process in place to identify objections to recognition of new qualifications and their addition to the qualifications table.  There are currently more than 3007 approved qualifications.   

Occasionally, approval of a qualification is sought by an individual who holds a qualification that has not been approved by the FCA.  In such circumstances the FCA staff will liaise with the qualification provider to determine if the qualification provider is prepared to pursue FCA approval of the qualification.

The FCA owns and oversees the production of and changes to the examination standards.  Examination standards are reviewed periodically.  Standards are prepared in collaboration with qualification providers, industry and awarding bodies and are published for comment prior to finalization.

The largest qualification provider in the UK is the Chartered Institute for Securities and Investment (“CISI”).  CISI creates examinations and study material, but does not offer courses; CISI accredits course providers to offer optional training.

Certain FCA-approved qualification providers work with third party exam administrators/proctors, such as Prometric or Pearson VUE.

1. Canadian Insurance Sales

To become licensed to sell life and/or accident and sickness insurance in Canadian jurisdictions other than Quebec, a person must successfully complete the Life License Qualification Program (LLQP).  The LLQP is offered through certain authorized course providers and insurers.8 Providers must be authorized by the provincial regulator in the jurisdiction(s) where they provide the course.  LLQP providers certify successful completion by students.  Although not required, most LLQP providers impose an examination requirement as part of its certification criteria.  The Canadian Insurance Services Regulatory Organizations (CISRO)9 publish annual LLQP provider statistics, including pass rates.

Currently, there is no course requirement in Quebec, however, all provincial regulators, through the auspices of CISRO, are engaged in a LLQP harmonization initiative.  Upon completion of this initiative in 2016, all Canadian jurisdictions, including Quebec, will require the LLQP.  The updated competency profile and curriculum have been completed.  The harmonization initiative will include the development of national course provider accreditation criteria for providers seeking authorization to offer the LLQP. 

Individuals holding a LLQP certificate are eligible to write the provincial licensing examination.  All Canadian jurisdictions, except British Columbia and Quebec, employ a common exam.  The LLQP harmonization initiative will result in a common exam for all jurisdictions, including British Columbia and Quebec.

The exam is administered by each provincial regulator, except the Financial Services Commission of Ontario (FSCO).  FSCO outsources the administration of the licensing examination to Serco DES Inc.  FSCO conducts a RFP process every three to four years to select an organization to administer and proctor the exams.

Application for an insurance agent license can be made to the provincial regulator once the exam is passed.  Most regulators require sponsorship of the applicant by an insurance company.

1. Canadian Securities Administrators (CSA)

The CSA prescribe under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations the minimum level of proficiency necessary for registration as a representative or chief compliance officer of a CSA-regulated firm.  The CSA recognize successful completion of specific exams (e.g., Canadian Securities Course exam, Exempt Market Products exam, Canadian Investment Funds Course exam, Investment Funds in Canada Course exam) and/or certain designations.  Relevant experience may also be considered with respect to proficiency for certain registration categories.

1. Model matrix and comparison of volumes

Regulatory Authority/Program	Model	Volume
FINRA	Standardized exam, no course requirement	493,115 Representatives 146,059 Principals10  180,00011 examinations administered in 2013
FCA	Multiple accredited educator-examiners/ Qualifications	32,690 retail investment advisers12
LLQP	Standardized exam, multiple accredited course providers	11,121 provincial licensing examinations written in 2013 in jurisdictions other than Quebec13
CSA	Certain recognized examinations and designations	Not available14
IIROC	Exclusive accredited educator-examiner	27,976 Approved Persons15 including 27,059 Representatives16  7,189 CSI course enrolments17 in 2013.  See Appendix A for a breakdown of enrolments.

1. Consideration of Alternatives

While quite different in approach, the proficiency assurance systems adopted by FINRA and the FCA both require significant regulatory oversight and operational infrastructure to function.  In the case of FINRA, there is a large complement of staff overseeing the creation and updating of competency profiles, content outlines, examinations, etc.  The FCA develops examination standards and continually reviews applications for approval of qualifications against these standards.  It must also review and approve the qualification providers.

The FINRA model benefits from an economy of scale not available to IIROC and its membership.  In the United States, there is a larger pool of existing and prospective licensees.  The difference between the size of the IIROC and FINRA licensee pools is dramatic.  The numbers of CSI course enrolments (7,189 in 2013) and FINRA exam administrations (approximately 180,000 in 2013) indicate the size of the respective proficiency markets.   The numbers of approved persons (27,976 IIROC Approved Persons and 639,174 FINRA approved persons) are indicative of, among other things, the size of the pool of people from which to draw for industry committees.  In our smaller market, there are fewer people available to work on industry committees to create the competency profiles, content outlines and examinations.  A very high level of engagement on the part of IIROC Members would be required to achieve a result similar to that of the FINRA industry committees.  A smaller proficiency market also means the comparative, per capita cost to IIROC Members of funding the requisite regulatory oversight structure and the education and testing costs would be more burdensome than the per capita costs borne by FINRA members.

The FCA regulates more approved persons than IIROC, but significantly less than FINRA, and employs a multiple provider system.  It must be noted, however, that the FCA’s proficiency regime is not like the IIROC regime.  Only certain retail activities are subject to proficiency requirements imposed by the FCA.  In contrast, IIROC imposes proficiency requirements on almost all Approved Persons.18  Were IIROC to adopt a multiple provider system similar to that of the FCA, it would be required to review applications of providers and qualifications covering all proficiencies.  That would increase the number of course qualifications to oversee, based on a comparison of activities subject to proficiency requirements under the IIROC and FCA regimes. 

FCA firms play a more significant role in proficiency assurance than IIROC Member firms.  FCA Firms are required to ensure the ongoing competence of their employees and to implement specific measures in that regard.    

The IIROC system focuses on both education and testing and integrates the course and examination.  Certain other systems, such as the FINRA system, impose only an examination requirement.  FINRA neither provides courses, nor regulates course providers.  The FCA has accredited many qualification providers and qualifications but does not involve itself in the provision of education.  Insurance regulators have standardized examinations and have accredited a number of course providers.  All of these models are instructive. 

1. The Next Phase

IIROC is of the view that high proficiency standards play a key role in investor protection and the integrity and efficiency of capital markets.  IIROC, accordingly, maintains high proficiency standards and a robust proficiency regime.

CSI was created in order to meet the particular proficiency assurance needs of IIROC Dealer Members.  The ten-year exclusivity contract, referred to earlier, ensured the success of CSI following its sale to ONCAP by the IDA.  This stability facilitated the growth and development of CSI’s business19 and expertise and its ability to meet IIROC’s increasing proficiency assurance service requirements as IIROC continued to raise the bar with respect to professionalism of Approved Persons.

Looking forward, and with the benefit of industry and other stakeholder input, IIROC will consider and evaluate the current IIROC model and alternative approaches to proficiency assurance.  IIROC will consider what type of approach best serves the public interest and meets IIROC’s regulatory needs as well as the needs of the industry, taking into account historical and regulatory context, cost, the IIROC approval scheme, enrolment volumes and other relevant factors. 

Ultimately, IIROC may conclude that the current model remains the best option, or it may be that certain elements of other models can be adopted in order to improve upon the current IIROC proficiency assurance model.

Should the information provided by commenters and IIROC’s analysis indicate that multiple education and/or examination provider accreditation is desirable going forward (i.e., post January 2016), IIROC would evaluate interested providers through a request for proposal process, in accordance with clear criteria. 

As IIROC and the membership enter the next phase of the evolution of the IIROC proficiency assurance model, IIROC will continue to work to optimize proficiency of license holders and ensure the highest levels of professionalism in the industry. 

1. Consultation Questions

1. Please comment on the benefits and drawbacks of the existing IIROC proficiency education and testing model.
2. Please provide IIROC with information regarding your experiences under the existing proficiency education and testing system.
3. Please discuss if and how your view of the existing IIROC proficiency education and testing model is influenced by the cost of CSI courses.
4. Please comment on the benefits and drawbacks of the alternative models, or elements of alternative models, discussed in this paper as well as their relevance and viability given the existing IIROC approval scheme and enrolment statistics.
5. Please share your experiences, if any, with alternative models.
6. Please discuss the criteria that you believe should be employed for evaluation of education and examination providers.

IIROC thanks you for your input.  Comments should be made in writing and delivered by November 17, 2014.

1. Attachments

Appendix A – IIROC Enrolments in CSI Regulatory Courses, 2013

Appendix B – Enrolments in CSI Courses, 2013

Annex A – History of IIROC’s relationship with CSI and the Agreement

Schedule 1 – Regulatory courses subject to the Agreement

Schedule 2 – Historical CSI pricing (retail and IIROC) of regulatory courses

Schedule 3 – Historical total and IIROC enrolments in regulatory courses

Schedule 4 – Quality and service standards under the Agreement

• 1The remainder of the proceeds, approximately $500,000, was allocated to top up the capital of the IDA.
• 2The renegotiated pricing terms, caps and freezes were communicated to Dealer Members via a letter sent from the President and CEO of IIROC to the executive management of each Dealer Member in April 2011. See Annex A for details of the pricing and other terms of the Agreement.
• 3See Annex A, Schedule 4 of this consultation paper for the detailed quality and service standards under the Agreement.
• 4The Trader Training Course is the exception. The TTC is not offered in French as trading systems are in English.
• 5The FCA regulates a range of activities, including accepting deposits, dealing in investments, home finance activities, establishing stakeholder pension schemes, entering funeral plan contracts, certain insurance activities, consumer credit activities, etc.  See http://www.fca.org.uk/firms/about-authorisation/do-i-need-to-be-authorised and http://www.fca.org.uk/firms/firm-types/consumer-credit.
• 6As at June 30, 2014. This number includes foreign qualification providers that are approved for a portion of a qualification. Another gap-fill course would also be required to complete the entire qualification. There are two gap-fill courses covering UK regulation, taxation and ethics
• 7As at June 30, 2014. As a consequence of Retail Distribution Review reforms, some of these courses fulfill only partial qualification requirements and must be combined with other courses (counted in this number) to achieve the qualification.
• 8See the list maintained by the Canadian Insurance Services Regulatory Organizations.
• 9CISRO is an inter jurisdictional group of regulatory authorities dedicated to developing consistent standards of qualifications and practice for insurance intermediaries.
• 10As at December 31, 2013.
• 11Approximately.
• 12As at July 31, 2013. 31,132 retail investment advisers as at December 31, 2012. Please see the following FCA press release for additional detail.
• 13The sum of the number of exams written as disclosed in CISRO’s LLQP Provider Results. This number does not include rewrites, only first attempts. (CISRO/OCRA)
• 14The CSA discloses in its 2013 Enforcement Report that the Canadian Securities Markets are comprised of 123,475 individual registrants, including registered and permitted individuals.  This figure includes IIROC Approved Persons.  This figure also includes registrants not subject to the CSA proficiency requirements of NI 31-103, such as UDPs and CFOs of firms operating on the CSA platform.  The CSA 2013 Enforcement Report also discloses that there are a total of 2,700 firms registered under the CSA umbrella (i.e., including IIROC firms).
• 15As at December 31, 2013.  Of the 27,976 Approved Persons, 2,917 were Supervisors and 95 were Non-industry directors.  Certain supervisory activities (e.g., a supervisor designated to pre-approve advertising, sales literature and correspondence, including research reports) are not subject to specific course requirements.  Non-industry directors holding less than 10% of the voting securities of a Dealer Member are not subject to specific course requirements.  These statistics are useful for purposes of understanding the size of the IIROC proficiency market.
• 16As at December 31, 2013.
• 17In 2013, a total of 7,189 IIROC learners enrolled in CSI regulatory courses (courses governed by the Agreement listed in Annex A, Schedule 1 of this paper).  The IMT, PMT and AIS are non-exclusive proficiencies in that the Chartered Financial Analyst designation is also recognized by IIROC as a licensing proficiency for discretionary portfolio management.
• 18See footnote 15.
• 19See Appendix B for a comparison of IIROC and non-IIROC enrolments in 2013 as an indicator of IIROC’s current significance to CSI’s business.