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    II. Product Description: Transparency Rating Mechanism (TRM)

    The above discussion clarifies two important facts: a) a strong, perceived need exists in the investor marketplace for greater firm transparency as a means of preventing further instances of corporate fraud and b) SOX, while it has many benefits, may not only be overly expensive but it does not apply to privately held firms. As a result, currently there is no established means of gauging the transparency of privately held firms. The product (i.e. TRM) introduced in this study is as a cost-efficient, flexible method by which public and privately held firms can provide the investor public with a detailed understanding of their internal control process.

    The proposed benefits of this new Transparency Rating Mechanism (TRM) are widespread and include the following:

    a) Decreased costs- the current implementation of SOX is very expensive both to firms and to society at large, and is widely acknowledged to be cost-inefficient.

    b) More and better information for the investor public- under the current system, knowledge of firms' internal control efforts are limited to two states (e.g. compliant vs. non-compliant). TRM will provide investors with a detailed understanding of firm's internal control efforts.

    c) Encourages flexibility- Under TRM, investors will be able to determine the value of compliance by choosing to invest in firms whose compliance practices match their own preferences.

    d) Encourage greater transparency- Under TRM firms would receive greater incentives to establish effective internal controls, as the information would be widely dispersed and publicly available.

    TRM utilizes a comprehensive ratings process very similar to Moody's for corporate bonds, as it is established and has been proven over time. The first step is that firms present information regarding their internal control efforts in a meeting lasting 2-4 hours. A rating committee with 5-7 (private) members compiles additional information on the firm's internal control efforts and then votes. An initial rating, ranging from "A" (i.e. excellent) to "F" (i.e. failing), is assigned with a thorough explanation. The firm has 1-2 day right to appeal, and the total process lasts approximately 3 weeks.

    All firms with public debt more than $50 million are rated. Additionally, privately held firms are also rated upon request. Firms also are expected to request rating before issuing equity and/or debt financing. Ratings are not audited processes, but they do focus on relevant factors including:

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    Product Life Cycle for Transparency Rating Mechanism:
    During the development stage of the Transparency Rating Mechanism it is important to incorporate features in the product that decrease the costs of compliance with the SOX to the buyers of Transparency Rating Mechanism, higher quality of information to the potential and present investors of the company, provides the facility of selecting firms with different levels of compliance and encourage greater transparency. Care should be taken that the use of Transparency Rating Mechanism should not trigger lawsuits relating to defamation by companies that are rated low. Moreover, the board established under the section 101 of the SOX 2002 is responsible for assessing the compliance with the Act and a product or an external company may not have the legal authority to judge the compliance with the act. In short, during the development stage the legal issues along with the market research should form the sound basis of the product.

    1. The Transparency Rating Mechanism will be relatively undifferentiated.
    2. The objective of your company will be to build awareness, ...

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