Data room compliance: Why it’s important & how to find a compliant VDR

Adherence to legal, regulatory, and industry-specific standards is a must for organizations that deal with clients’ data. Compliance should be front of mind when making any decisions regarding the business,  with 83% of risk and compliance professionals stating that it is “very important or absolutely essential”. 

During M&A and other financial transactions, stakeholders share large amounts of confidential information, typically using a virtual data room (VDR). In this article, we’ll look at why it’s important for VDRs to be compliant with global data protection and privacy regulations, and how you can ensure you’re using a compliant VDR.

Understanding virtual data rooms’ regulatory compliance

For a virtual data room to be compliant means that it adheres to a set of legal, regulatory, and industry-specific standards that ensure the secure and proper management of clients’ sensitive information such as confidential documents and personal information. 

In the context of virtual data rooms, compliance typically covers the following aspects:

• Data security and privacy
  A compliant virtual data room ensures that clients’ data is protected against unauthorized access, leaks, and data breaches. It can be achieved through measures such as data encryption at rest and in transit, secure user authentication methods, and regular security audits.

• Access controls
  A virtual data room provider must implement strict access controls ensuring that only authorized users can access specific sensitive documents. It can be achieved through security features such as role-based access, several levels of granular file access permissions, or multi-factor authentication.

• Audit trails
  A VDR provider should maintain detailed logs of all user activities inside a virtual data room. This includes information such as who accessed which documents and when, plus any action they took. For accountability and legal compliance, it’s mandatory for virtual data rooms to offer audit trails.

• Data integrity
  This is about making sure no documents are tampered with. Measures include digital watermarks, version controls, and secure document-sharing protocols.

• Data backup and recovery
  Compliant virtual data rooms implement robust data backup and recovery procedures to protect against data loss and ensure business continuity in case of an emergency.

• User training and policies
  For a VDR to be compliant, it’s also important to provide adequate training to users on the importance of data security and compliance, as well as enforcing policies and procedures that support compliance efforts.

• Regulatory compliance with laws and industry regulations
  Adherence to all the above measures results in virtual data rooms being in compliance with recognized industry standards and certifications, such as ISO 27001 (Information Security Management), SOC 2 (System and Organization Controls), and others that can help it demonstrate a commitment to maintaining high security and operational standards.

Why should a virtual data room be compliant?

Let’s explore why security is the top priority for VDR users and why virtual data rooms should be compliant.

1. Users’ data protection and privacy
   By being compliant with regulations like GDPR (General Data Protection Regulation) or CCPA (California Consumer Privacy Act), a virtual data room ensures that the personal and sensitive data of its users is protected. This helps prevent data breaches and misuse of information.
2. Legal requirements
   Typically, there are specific regulations that dictate how data should be stored, accessed, and shared in every industry or region. Non-compliance can lead to legal penalties, fines, and other consequences.
3. Users’ trust and credibility
   Naturally, a compliant virtual data room guarantees secure document sharing and data management, as well as the privacy of client data. This enhances the trust and credibility of the VDR provider since clients are more likely to choose a vendor that adheres to stringent data security and privacy standards.
4. Industry requirements
   Certain industries, like finance, healthcare, and legal sectors, have strict regulations (such as HIPAA for healthcare or FINRA for finance) that VDRs must comply with if they are to be used for specific types of business transactions and data handling.
5. Client requirements
   Many clients, especially large corporations and financial institutions, require their vendors, including VDR providers, to comply with specific regulations as part of their vendor risk management programs. 

Main regulations

The list of regulations and laws a virtual data room provider should comply with depends mainly on its business operations, location, or industry. 

Let’s briefly review the most common regulations that a VDR should adhere to.

Consequences of non-compliance for a virtual data room

So, what could potentially happen to a virtual data room provider that’s non-compliant with key regulations? Here are some possible ramifications:

• Legal penalties and fines
  VDR providers that don’t comply with required data protection laws and industry regulations may face heavy fines from regulatory bodies. For instance, fines for non-compliance with GDPR can reach up to €20 million or 4% of an annual global turnover.

• Lawsuits and other legal actions
  Non-compliance can also lead to lawsuits from affected parties, including clients and individuals whose data has been mishandled or exposed. For a virtual data room provider, this can result in significant legal costs and damages. 

• Reputational damage
  Naturally, a failure to comply with required regulations can severely damage a VDR provider’s reputation. As a result, this can lead to a loss of trust and credibility, making it difficult to attract and retain clients.

• Loss of business
  Clients, especially those in highly regulated industries, may stop doing business with a non-compliant VDR provider. This can result in a significant loss of revenue and market share, even leading to total business failure.

• Operational disruptions
  Temporary failure to comply with required regulations may still lead to ensuring compliance in the future to keep business operations. This, in turn, can lead to investigations and the need to implement corrective measures, which can disrupt business operations and result in increased costs and reduced efficiency.

• Data breaches and security incidents
  This is a consequence of non-compliance that VDR clients might face. Non-compliance often correlates with inadequate data security measures, increasing the risk of data breaches and cyberattacks. These incidents can lead to data loss, unauthorized access, and the exposure of clients’ sensitive and confidential data.

Virtual data room compliance checklist

Now, let’s take a closer look at what users should pay attention to when ensuring a virtual data room provider is compliant. 

How to find a regulatory-compliant data room in 4 main steps

Below is a list of recommendations when looking for a regulatory-compliant data room to be used when managing a due diligence process, intellectual property deals, and other complex financial transactions: 

• Identify regulatory requirements you need to follow
  To get the best regulatory-compliant virtual data room, you first need to understand what regulations are mandatory for your company to follow and what compliance certificates to look for in a VDR. For instance, if your company deals with EU residents’’ data you’ll definitely need a GDPR-compliant VDR vendor.
• Evaluate compliance and security features
  Check what security features and compliance certificates virtual data room providers offer and how relevant they are to your needs.
• Request demonstrations or trials
  The best way to test the quality of services provided and verify the availability of claimed certifications and compliance is to test a specific provider. Moreover, trials allow for evaluating customer service, which is also an important component of a regulatory-compliant VDR.
• Conduct a legal review
  It’s sometimes relevant to involve your legal team to help with reviewing terms of services, privacy policies, compliance documentation, and SLAs.

Note: To learn more about the VDR selection process and compare the main players in the industry, explore our comprehensive VDR selection guide.

Working with iDeals to ensure compliance 

iDeals might be the right choice for you if you’re in search of a regulatory-compliant, due diligence data room or a data room for audit and compliance. This is what iDeals offers: 

• Set of advanced security features
  iDeals ensures users’ data security with advanced features such as in-built redaction, two-factor authentication, time and IP address restrictions, Fence View, and eight levels of document access rights.
• Top compliance certifications
  iDeals has such compliance certifications as GDPR, HIPAA, SOC 2 and 3, and ISO 27001.
• Training programs and quality customer support
  iDeals ensures new users get training before using a virtual data room so that everyone knows exactly how it secures document storage. What’s more, iDeals provides quality customer service, which many clients say sets us apart.
• Detailed audit trails
  With the help of comprehensive audit trails, the iDeals VDR tracks every action precisely to the second.
• Granular access permissions
  iDeals’ eight levels of granular access permissions, ensuring that only authorized users can access sensitive data. This is something that physical data rooms can’t guarantee.
• Real-time data backup and disaster recovery
  iDeals offers real-time data backups through encrypted VPN tunnels and has geographically remote data centers covering “worst case” scenarios in the face of potential disasters such as fire or flood.  

Key takeaways

• A virtual data room is compliant when it adheres to a set of legal, regulatory, and industry-specific standards that ensure the secure and proper management of clients’ sensitive data.
• Non-compliance can result in legal penalties and fines, lawsuits, reputational damage, operational disruptions, and a loss of business. For a client, the main consequence is a breach involving their sensitive data.
• Among the main compliance regulations are FINRA, GDPR, HIPAA, FISMA, SOC 1 and 2, SOX, and ISO 27001.

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