Cybersecurity & Data Privacy Issues in Fund Finance

The European Union’s AI Office published the inaugural General-Purpose AI Code of Practice on November 14, 2024. The Code is intended to assist providers of AI models in their preparations for compliance with the forthcoming EU AI Act, to be enforced from August 2, 2025. The Code is designed to be both forward-thinking and globally applicable, addressing the areas of transparency, risk evaluation, technical safeguards and governance. While adherence to the Code is not mandatory, it is anticipated to serve as a means of demonstrating compliance with the obligations under the EU AI Act. Following a consultation period that garnered approximately 430 responses, the AI Office will be empowered to apply these rules, with penalties for nonconformity potentially reaching 3% of worldwide turnover or €15 million. Three additional iterations of the Code are anticipated to be produced within the coming five months.

On October 29, 2024, the DOJ issued a proposed rule prohibiting and restricting certain transactions that could allow persons from countries of concern, such as China, access to bulk sensitive personal data of U.S. citizens or to U.S. government-related data (regardless of volume).

During the course of any lending transaction, lenders will conduct a due diligence review of the borrower, including reviewing any relevant “know-your-customer” information.

Following the publication of the European Union’s Artificial Intelligence Act (AI Act or Act) on 12 July 2024, there are now a series of steps that various EU bodies need to take towards implementation. One of the first key steps is in relation to the establishment of codes of practice to “contribute to the proper application” of the AI Act.

On July 30, 2024, the Senate passed the Kids Online Safety and Privacy Act (S. 2073) via an overwhelmingly bipartisan vote of 91-3 shortly before departing for the August recess.

On 12 July 2024, the European Union Artificial Intelligence Act (AI Act or Act) was published in the Official Journal of the European Union (EU), marking the final step in the AI Act’s legislative journey. Its publication triggers the timeline for the entry into force of the myriad obligations under the AI Act, along with the deadlines we set out below. The requirement to ensure a sufficient level of AI literacy of staff dealing with the operation and use of AI systems will, for example, apply to all providers and deployers on 2 February 2025.

On June 18, 2024, the United States Securities and Exchange Commission (SEC) announced a settlement with R.R. Donnelley & Sons Company (RRD) for alleged internal control and disclosure failures following a ransomware attack in 2021. Without admitting or denying the SEC’s findings, the business communications and marketing services provider agreed to pay a civil penalty of over $2.1 million to settle charges alleging violations of Section 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 13a-15(a).¹

In May, the National Institute of Standards and Technology (NIST) issued updated recommendations for security controls for controlled unclassified information (CUI) that is processed, stored or transmitted by nonfederal organizations using nonfederal systems, (NIST Special Publication 800-171 (SP 800-171), Revision 3). These security requirements are “intended for use by federal agencies in contractual vehicles or other agreements that are established between those agencies and nonfederal organizations.”¹ While these new controls are only applicable to nonfederal entities that agree to comply with the new issuance, Revision 3 signals the next phase of expected security for government contractors.