Like any other document storage system, a virtual data room must adhere to global data protection and privacy regulations to ensure your sensitive information is secure and legally protected. In addition, data rooms should provide advanced tools to help users audit and monitor compliance throughout the transaction process.
But how can you be sure that your VDR is fully compliant and up to the task?
In this article, we help you choose a solution that meets stringent regulatory standards.
Key highlights
- What is VDRs regulatory compliance?
- What are the main virtual data room compliance regulations?
- What are the consequences of non-compliance for virtual data rooms?
- How to find a regulatory compliant data room?
- What are the best virtual data room solutions?
What is VDRs regulatory compliance?
Compliance in virtual data rooms is the adherence to legal, regulatory, and industry-specific standards that ensure the secure data management. It is crucial for the integrity, security, and legality of confidential information shared and accessed within a data room, particularly in sensitive transactions like mergers and acquisitions, audits, and legal cases.
Key compliance aspects for VDRs include the following:
- Data security and privacy. A secure virtual data room protects client data from unauthorized access and breaches through encryption, secure authentication, and regular security audits.
- Data integrity. VDR digital watermarks, version control systems, and secure document-sharing protocols preserve the authenticity of files and maintain data integrity.
- Access controls. The solution features role-based access, detailed file permissions, and multi-factor authentication. Thus, only authorized users can view sensitive documents in the storage, which makes virtual data rooms secure.
- Audit trails. Compliant virtual data rooms record all user activities, including who accessed confidential documents, when, and what actions were taken. These logs ensure legal compliance and provide a clear activity record.
- Data backup and recovery. Compliant solutions incorporate reliable data backup and recovery procedures to provide business continuity and mitigate the risk of losing critical information during emergencies.
- Regulatory compliance with laws and industry regulations. Virtual data room providers comply with recognized industry standards and certifications, such as ISO 27001 (Information Security Management) and SOC 2 (System and Organization Controls), demonstrating their commitment to bank-grade security and effective operational standards.
- User training and policies. Data room providers educate users on data security and ensure they follow proper procedures to maintain the platform’s integrity. They do it through training programs, guidelines, periodic assessments, and continuous support.
All these data room features, practices, and measures guarantee robust security and full regulatory compliance throughout the deal life cycle.
What are the main VDR compliance regulations?
The regulations and laws a virtual data room provider must comply with primarily depend on its operations, location, and industry.
Here is a brief overview of the most common regulations a VDR provider should follow:
| Regulation | Requirements | Region | Scope |
| GDPR(General Data Protection Regulation) | Notify of data breaches within 72 hours Implement data protection by design and default Control access to personal data Restrict cross-border data transfers | European Union | Any organization handling the personal data of EU citizens |
| FINRA(Financial Industry Regulatory Authority) | Protect customer data Maintain written policies for data security Regularly review and update security protocols | United States | Financial firms, including brokers and exchanges |
| FISMA(Federal Information Security Modernization Act) | Continuously monitor compliance with federal standards Develop and document an information security program Conduct regular risk assessments | United States | Federal agencies and contractors |
| HIPAA(Health Insurance Portability and Accountability Act) | Ensure confidentiality, integrity, and availability of health data Apply safeguards (administrative, physical, and technical) Conduct risk assessments regularly Notify in case of data breaches | United States | Healthcare entities, including providers and insurers |
| SOX(Sarbanes–Oxley Act) | Maintain accurate financial records Enforce internal controls for financial reporting Perform regular audits and reviews of financial practices | United States | Publicly traded corporations |
| ISO 27001(International Organization for Standardization) | Implement an Information Security Management SystemConduct regular security training for staff Perform routine security audits Continuously improve security protocols | International | Globally across industries |
| SOC 1 and SOC 2(System and Organization Controls) | Implement advanced security measures Control access to systems Regularly audit security practices Establish an incident response plan Use data encryption for sensitive information | International | Globally across industries |
Given the strict regulations VDR providers must follow, data room users can trust that their sensitive data is protected.
What are the consequences of non-compliance for virtual data rooms?
What could happen to a virtual data room provider that fails to comply with key regulations?
Here are several potential consequences:
1. Financial and legal consequences
A provider may face substantial fines from regulatory authorities. Examples include GDPR penalties of up to 4% of global turnover and HIPAA fines ranging from $100 to $25,000 annually. Non-compliance can also lead to lawsuits over mishandled data, bringing legal costs, reputational harm, and loss of client trust.
2. Business loss
Clients from heavily regulated industries like finance or healthcare may terminate partnerships with a non-compliant VDR provider. It results in a sharp decline in revenue, a shrinking market share, and business closure.
3. Operational disruptions
Even temporary non-compliance requires corrective actions, investigations, and adjustments to meet regulations. This process can disrupt daily business operations, cause delays, and increase operational costs.
4. Increased scrutiny
Failure to meet regulatory requirements may also lead to heightened scrutiny from regulatory bodies, including audits that assess the company’s practices in detail. This oversight may interfere with operations and continue until the provider demonstrates full adherence to regulations.
Anticipating more scrutiny Forward focus for Ethics and Compliance
5. Security incidents
Since non-compliance often correlates with inadequate data protection measures, it can increase the risk of data breaches and cyberattacks. These incidents result in losing or exposing sensitive client data, leading to financial and reputational damage for VDR providers.
Chart: EU Data Protection Fines Hit Record High in 2023 | Statista
6. Inability to expand or innovate
A non-compliant data room may face restrictions on its ability to grow or expand into new markets. Specifically, legal and compliance barriers may prevent the introduction of new features or services and limit the company’s ability to stay competitive and innovate.
Data room providers pay special attention to compliance since it determines the security of sensitive data, mitigates legal and financial risks, ensures adherence to regulatory requirements, and builds client trust.
Virtual data room compliance checklist
Consider the following points to ensure regulatory adherence and virtual data room security:
| Compliance area | What to check | Why it is important |
| Compliance certification | Compliance certificates. Look for recognized compliance certificates such as GDPR, ISO 27001, and SOC 2 | Ensures the provider meets industry standards and regulatory requirements |
| Data security and encryption | Encryption. Ensure AES-256 encryption is used for data at rest and in transitSSL/TLS. Verify SSL/TLS protocols are used for secure file sharing | Protects sensitive data from unauthorized accessSecures data during transmission |
| Data backup and disaster recovery | Regular backups. Ensure the VDR performs regular backups to protect against data lossDisaster recovery plans. Check that the provider has a documented recovery plan in case of breaches or system failures | Prevents permanent data lossEnsures data can be quickly restored after an incident |
| Data retention and deletion policies | Retention policy. Verify the data room service has clear retention policies that comply with applicable regulations and contractsDeletion policy. Ensure the vendor offers secure deletion methods to remove data when it is no longer needed permanently | Ensures that data is kept only for as long as necessaryGuarantees that data is securely deleted |
| Audit trails and activity monitoring | Audit logs. Confirm the VDR provides detailed logs of user activity, including document access, changes, and downloadsReal-time monitoring. Ensure the software detects and responds to unauthorized access promptly | Tracks all activity for accountabilityDetects and mitigates security threats in real-time |
| Access controls | Role-based access. Confirm the platform provides role-based access to limit data access according to user rolesUser authentication. Check for strong user authentication methods, such as multi-factor authentication | Ensures that only authorized personnel can access specific dataEnhances security by making it harder for unauthorized users to gain access |
| User training and support | Training programs. Ensure the solution offers user training on security practices and platform usageCustomer support. Confirm 24/7 support is available for addressing issues or security concerns | Helps users understand security protocols, reducing the likelihood of human errorProvides timely assistance for continuous, secure access to virtual data rooms |
| Provider reputation | Industry reputation. Research the provider’s reputation in the industry, including history of breaches or compliance issuesReferences and case studies. Ask for references or case studies from other organizations that have used the virtual data room | Helps assess the VDR’s reliability and trustworthinessProvides insight into the provider’s track record and helps validate its effectiveness in meeting your needs |
| Legal and contractual considerations | Data ownership and access rights. Ensure the contract specifies that your organization retains data ownership | Ensures your organization retains full control and ownership of its data, preventing unauthorized use, transfer, or misuse by third parties |
How to find a regulatory compliant data room?
Follow the steps below:
1. Identify your regulatory requirements
Understand the specific regulations that your company must adhere to. For example, if your business processes data from EU residents, ensure the data room is GDPR-compliant. Similarly, if your organization handles healthcare data in the United States, choose the virtual data rooms that comply with HIPAA.
2. Evaluate security and compliance features
Assess the security features and each VDR certificate of compliance offered by providers. Determine whether their certifications are relevant to your needs. For example, if your organization is in the financial sector, look for SOC 2 or ISO 27001 certifications to meet industry-specific security and data protection standards.
3. Request demos or trials
Testing a data room solution through demonstrations or trial periods is a practical way to verify the provider’s claims regarding compliance and security. These trials also allow you to evaluate their customer service, which is crucial for addressing potential compliance issues.
4. Conduct a legal review
Have your legal team review the terms of service, privacy policies, compliance documentation, and service level agreements of the provider. This is how you can check the service meets all necessary legal requirements and can address all your data protection needs.
Note: Compare the leading virtual data room providers and choose the best one for your next deal.
Using virtual data rooms to ensure compliance: What are the best solutions?
To help you select the right data room for audit and compliance, we have ranked the top providers based on their security features and compliance with industry standards. The best solutions are as follows:
| Ideals | Intralinks | Datasite | |
| Compliance | |||
| GDPR | ✅ | ✅ | ✅ |
| FINRA | ✖️ | ✖️ | ✖️ |
| FISMA | ✖️ | ✖️ | ✖️ |
| HIPAA | ✅ | ✅ | ✖️ |
| SOX | ✖️ | ✖️ | ✖️ |
| ISO 27001 | ✅ | ✅ | ✅ |
| SOC 1 | ✅ | ✖️ | ✖️ |
| SOC 2 | ✅ | ✅ | ✅ |
| Top security features | |||
| Real-time data backup | ✅ | ✅ | ✅ |
| 256-bit encryption | ✅ | ✅ | ✅ |
| Detailed audit logs | ✅ | ✅ | ✅ |
| Granular access controls | ✅ 8 levels | ✅ 4 levels | ✅ 5 levels |
| Two-factor verification | ✅ | ✅ | ✅ |
| IP-address access restriction | ✅ | ✖️ | ✖️ |
| User access expiration | ✅ | ✖️ | ✖️ |
| User security impersonation | ✅ | ✖️ | ✖️ |
| Remote wipe and shred | ✅ | ✖️ | ✖️ |
iDeals outperforms Intralinks and Datasite with its strong compliance, security features, and user-focused controls. Unlike competitors, iDeals meets HIPAA and SOC 1 standards, making it ideal for industries with strict regulatory requirements. Moreover, with 8 levels of granular access, user access expiration, and IP address restrictions, you gain more precision in managing who can interact with your data.
FAQ
1. Can physical data rooms be compliant with regulations?
While a physical data room can meet specific security standards, such as restricted access and monitoring, it doesn’t have the built-in compliance features that a virtual data room offers. For example, physical data rooms lack automated audit trails, data encryption, and real-time user activity monitoring, making them less effective for compliance.
2. What is the difference between GDPR (General Data Protection Regulation) and CPRA (California Consumer Privacy Act)?
Under the GDPR, businesses must have a valid legal basis, such as consent, to collect personal data. In contrast, the CCPA requires businesses to allow users to opt out of collecting their personal information. While the GDPR applies to individuals within the EU, the CCPA explicitly protects the privacy rights of California residents.
3. How do I verify a VDR’s compliance history?
Research the provider’s certifications, customer reviews, and case studies. Additionally, ask the provider for proof of their compliance with relevant regulations and request a demo to see how their virtual data rooms operate in practice.
4. How much do compliant virtual data rooms cost?
The cost of a compliant solution depends on the features, storage capacity, and duration of use. Solutions with high-level security and compliance certifications may cost more due to the advanced features and certifications required. However, investing in bank-grade security and compliance can save you from costly legal or data security issues.