The new proposal will encourage larger transparency about what data is being collected and how they will be used, and discourage the need for vaguely worded privacy or user notices.

A. encourage larger transparency about what data is being collected and how they will be used, and discourages the need for vaguely worded
B. encourage greater transparency regarding what data is being collected and how it will be used, but discourage the need of vaguely worded
C. encourage greater transparency about what data is being collected and how it will be used, and discourage the need for vaguely worded
D. encourage greater transparency on what data is being collected and how it will be used, and this will discourage the need for vaguely worded
E. encourage greater transparency for what data is being collected and how it will be used, and discourages the need for vaguely worded

(A) "larger transparency" is nonsensical (it's not about size). "Data" is singular here (you can tell from the "is"), so "they" is wrong. Encourage/discourages isn't parallel.

(B) "need for" is the correct idiom here. A bigger issue is the use of "but," which implies some kind of contradiction, even though here it's not a contradiction at all. Notice the GMAT gives you something more grammatical than the tough idiom.

(C) Correct!

(D) "Transparency on" is idiomatically in correct. The "this" is totally ambiguous, plus the meaning is now wrong. The first thing doesn't lead to the second thing. They are two separate things!

(E) "Transparency for" doesn't make sense. Encourage/discourages isn't parallel.

I realize your question here is about "need of"/"need for", but I'm not quite sure how to explain it, other than to give examples:

"I have need of money."
"There's no need for histrionics."
"He implied that my need of affection was unfair."
"He says there's no need for alarm."

Perhaps the best explanation is that "need of" is personal, where "need for" is general. In other words, when a person/thing needs a specific thing, you should use "need of." When you're speaking of a more general state, you use "need for." However, notice that question doesn't revolve around only that split.

-t