Major Overhaul Affecting Federal Grant Recipients: Administration Moves to Codify Policy Priorities in OMB Regulations

On May 29, 2026, the Office of Management and Budget (“OMB”), joined by more than 40 federal grantmaking agencies, formally initiated the process to make substantial changes to the government-wide regulations for financial assistance found at 2 CFR Part 200, currently known as the “Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards” – also referred to as the “Uniform Guidance.” The long awaited proposed rule reflects changes and policy priorities outlined in the August 7, 2025, Executive Order 14322, Improving Oversight of Federal Grantmaking.

The proposed rule will affect new federal grants and awards to virtually every entity that receives them, including under cooperative agreements. Some provisions apply only to discretionary awards, and others apply to all federal assistance. Note that the rule does not apply to existing fixed-amount awards issued prior to the effective date or (unlike recent executive orders) or federal procurement contracts (FAR-based contracts). Though these regulations are limited to organizations accepting federal funds through awards or grants, this includes many non-profits, state and local governments, research institutions, institutions of higher education and selected corporations. Comments are due July 13, 2026. OMB proposes to issue a final rule with an effective date of October 1, 2026.

Jump to:

• Overview
  
• New and Expanded Screening
  
• Expanded Termination and Suspension Authority
  
• Enhanced Oversight and Reporting
  
• Cost Principles and Allowability Changes
  
• Policy-Based Funding Restrictions
  
• Next Steps
  

Overview

OMB lists three objectives for the rulemaking: (1) improving transparency, accountability, and oversight; (2) clarifying that CFR Part 200 is a binding regulation; and (3) reducing recipient burden. For the proposed rule to become binding, OMB must review and respond to public comments, potentially revise the rule, and publish a final rule in the Federal Register—a process that typically takes six to twelve months but can be expedited. Given the Administration’s commitment to embedding these policy priorities into regulatory frameworks, and the resources already invested in this rulemaking, observers expect OMB to finalize a version of this rule without delay, though litigation challenging specific provisions is likely.

If adopted, the rule will become a binding regulation named the “Uniform Grants Regulation.” OMB characterizes this change as a “clarification,” noting that agencies inconsistently adopt Part 200 and that the current structure—with OMB issuing “guidance” that agencies must formally adopt—confuses recipients. This reclassification raises significant legal questions regarding OMB's authority, the rule’s enforceability, and the consequences for the broad universe of non-federal entities receiving federal financial assistance. The conversion also has practical significance: future OMB amendments to 2 CFR Part 200 would take effect government-wide on OMB's stated effective date without requiring dozens of separate agency rulemakings.

Although the proposed rule is designated a "significant regulatory action," the significance of converting Part 200 to binding regulation is downplayed. This approach may invite an Administrative Procedure Act (“APA”) challenge on the grounds that the conversion itself constitutes a substantive change in legal obligations that was not adequately explained or supported in the rulemaking record, or that the 45-day comment period is insufficient for a rulemaking of this scope. Further, it is unclear whether noncompliance of the Part 200 regulation would constitute not merely a breach of contract justifying termination or fund recovery, but also a violation of a binding federal regulation — potentially exposing recipients to enforcement actions and other remedies that attach to regulatory violations including potentially enhanced False Claims Act exposure (something we have discussed previously).

The proposed rule also arrives in the new, post-Chevron world. The Supreme Court overruled its 1984 decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the precedent that required federal courts to defer to agencies’ “reasonable” interpretations of ambiguous statutes they administer. In Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), the Court held that under the APA, courts must “exercise their independent judgment in deciding whether an agency has acted within its statutory authority” and “may not defer to an agency interpretation of the law simply because a statute is ambiguous.” While OMB’s authority to impose binding regulatory requirements on non-federal entities remains untested, the end of the Chevron deference means that any legal challenge to the proposed rule will, in principle, be resolved without the thumb on the scale that agencies previously enjoyed. Courts will apply their own independent judgment to the threshold question of whether OMB’s claimed statutory authorities authorize binding requirements on grant recipients—a question that may be more contestable than OMB’s preamble suggests.

This alert highlights significant proposed changes and practical considerations but is not comprehensive (the full proposed rule with preamble runs more than 100 pages in the Federal Register). In assessing next steps, funds recipients should analyze the risks, how it will apply in their specific context, and take appropriate precautions.

New and Expanded Screening (Jump to top)

Under revised Sections 200.205 and 200.206, senior appointees must conduct reviews of proposals selected for funding (before issuing said funding) to ensure that discretionary awards “demonstrably advance the President’s policy priorities” and reflect the administration’s risk calculus. OMB’s explanations are here (200.205) and here (200.206); see also our discussion of policy-based funding restrictions below.

• Revised § 200.205. Prescribes a “merit review” process for discretionary awards. Under section (b): The screening process must ensure that awards do not “fund, promote, encourage, subsidize or facilitate … initiatives that compromise public safety or promote anti-American values.” It specifically lists as prohibited: illegal immigration, racial preferences (including activities where race or intentional proxies for race will be used as a selection criterion for employment or program participation), and “gender ideology” or denial of “the sex binary in humans.”
• Revised § 200.206. The proposed rule dramatically expands the factors a Federal agency should consider about a recipient as part of its pre-award risk assessment to add: financial capacity; “history of questionable practices” such as plagiarism, discredited studies, memberships and affiliations with organizations that violate Federal law, undermine public safety or national security, or advocate for the overthrow of the U.S. Government; and compliance with foreign gift and contract reporting under Section 117 of the Higher Education Act of 1965, 20 U.S.C. § 1011f.

Practical Implications for Clients:

Prospective funding recipients—and those reapplying for existing grants—should prepare for background review and new substantive screening, including:

• Review funding restrictions on administrative-policy-disfavored initiatives (discussed below).
• Review risk factors including memberships and affiliations.
• Review existing grants to determine whether renewals will be structured as “new” awards subject to the new requirements.

Expanded Termination and Suspension Authority (Jump to top)

Following more than a year of litigation over DOGE’s efforts to terminate federal grants, the proposed rule significantly expands federal agencies’ authority to terminate or suspend awards—including a new discretionary termination right analogous to "termination for convenience" in federal procurement contracts. By codifying discretionary termination in binding regulation—rather than guidance—the government would substantially increase its power over grantees. Financial assistance awards differ fundamentally from procurement purchases: they are conditional funding mechanisms under the Spending Clause, and there may be challenges as to whether unilateral government termination absent cause or agreed terms is permissible.

• Discretionary Termination (Revised § 200.340). Federal agencies could terminate awards in whole or in part if the agency determines termination is in its interest—including where an award "does not effectuate program goals, Federal agency priorities, or the national interest as they exist at the time of the termination." This provision will be required in all discretionary awards unless it violates a federal statute. Exceptions apply to statutory entitlement programs (such as block grants or formula-based awards), awards under international trade agreements, and certain CHIPS Act and Infrastructure Investment and Jobs Act awards.
• Temporary Suspension (New § 200.340(e)). Under this new provision, agencies could issue written orders temporarily suspending awards for up to 90 days if the agency “determines that a suspension is in the interest of” the funding agency. Recipients must stop work and take reasonable steps to minimize costs. The suspension period may be extended only by mutual agreement.
• Termination Notice and Cost Recovery (Revised §§ 200.341, 200.343). Agencies must provide written notice including a “brief summary” of the reason for termination and an opportunity for the recipient to submit a written statement of termination costs. Agencies have discretion—but no obligation—to authorize additional post-termination costs. Administrative hearing rights apply only to terminations for noncompliance, not discretionary terminations, raising potential procedural due process concerns.

Practical Implications for Clients

These changes could increase unpredictability in the federal grants universe, with reverberating impacts on subrecipients and the related supply chain. All discretionary award recipients should anticipate that new awards will contain discretionary termination and suspension provisions. Entities planning projects and procurements should account for the possibility of suspension or termination at any point in their contracts and budgets.

Enhanced Oversight and Reporting (Jump to top)

The proposed rule strengthens monitoring, reporting, and internal control requirements for recipients and subrecipients across several dimensions. The resulting impact on recipients will be additional compliance and resource burden.

• Conflict of Interest (Revised § 200.112). As an enhancement to the existing rule, recipients must disclose whether employees who worked on an application or will support the award were employed by the awarding agency within the preceding two years. The preamble explains that this disclosure is for informational purposes and does not by itself represent a conflict of interest.
• Mandatory Disclosures (Revised § 200.113). To accelerate prosecution for alleged misconduct, the revised provision on mandatory disclosures will require the agency Offices of Inspector General must transmit mandatory disclosures of potential fraud to the U.S. Attorney's Office within ten days.
• Safeguarding Information (Revised § 200.303(e)). The Internal Controls provision is expanded to specify that proper internal controls include taking reasonable cybersecurity and other measures to safeguard information, including personally identifiable information, confidential business information, and other types of information subject to protection against disclosure.
• E-Verify Requirement (New § 200.303(f)). All recipients and subrecipients must participate in DHS’s E-Verify program to confirm employment eligibility of all employees and contractors hired in or performing work in the United States under a federal award. Failure to take appropriate action on a Final Nonconfirmation (FNC) notice may result in award termination.
• Pre-Payment Verification and Justification (New § 200.303(g); Revised § 200.305(a)). Federal agencies and states will be required to verify recipient eligibility through Treasury's "Do Not Pay" system before disbursing payments. Payment requests from all recipients other than States must include justifications describing the purpose and specific award-related work.
• Subaward Reporting and Tracking (Revised §§ 200.329, 200.331, 200.332). Several proposed changes will tighten oversight over subawards.
• Pass-through entities must report subawards on SAM.gov no later than the end of the month following the subaward. Recipients must confirm subaward reporting in performance reports.
• The proposed rule confirms that affiliates, subsidiaries and other related entities should receive no special treatment and must classify any internal transfers of federal funds to related entities as either subawards or contracts and report them accordingly.
• In proposed new provision 200.332(i), OMB specifies that pass-through entities must ensure that subrecipients do not “take actions that could significantly damage the reputation of the pass-through entity, the Federal agency making the award, or the Federal Government,” and that where such actions occur, the pass-through entity must consult with the Federal agency to determine whether termination of the award is warranted.
  

Practical Implications for Clients

• Applicants should be prepared for heightened scrutiny of organizational practices, affiliations, and track record as part of the pre-award process.
• Applicants should review proposals for the administration’s policy-driven screening (but note that merely revising language to avoid screening while using funds for what the administration considers to be prohibited activities risks False Claims Act liability).
• Organizations not currently enrolled in E-Verify should begin preparations for enrollment and integration into internal hiring processes.
• Pass-through entities should review their subaward tracking and SAM.gov reporting processes, particularly for payments to affiliates or related organizations.
• All recipients should update internal controls and financial procedures to accommodate justification requirements for payment requests.
  

Cost Principles and Allowability Changes (Jump to top)

Consistent with the Administration’s efforts to impose stricter controls on grantees, the proposed rule restricts several categories of costs and eliminates certain award types the Administration views as lacking adequate oversight. For many recipients, these changes are likely to increase the overall cost and administrative burden of federal financial assistance awards.

• Elimination of Fixed Amount Awards and Subawards (Revised §§ 200.201, 200.333). Fixed amount awards and subawards will no longer be permitted under the proposed rule unless authorized by federal statute.
• New or Tightened Unallowable Costs. Allowability of the following costs will be restricted:
• Advertising and public relations costs are unallowable except where required by statute or narrowly related to procurement, disposal, or program outreach. (Revised § 200.421)
• Commencement and convocation costs are unallowable for all entity types, not only institutions of higher education. (Revised § 200.429)
• Conference attendance costs are allowable only if expressly approved by the agency and included in award terms. (Revised § 200.432)
• Fundraising and investment management costs require prior written agency approval. (Revised § 200.442)
• The provision disallowing lobbying costs is expanded to add new subsections also banning issue advocacy, voter registration campaigns, and efforts to influence state executive branches on matters unrelated to award objectives. (Revised § 200.450)
• Memberships, subscriptions, and professional activity costs must be necessary to fulfill award requirements and receive prior agency approval. (Revised § 200.454)
• Costs associated with elective abortions are unallowable except as expressly authorized by federal law. (Revised § 200.477)
• Nonprofit Organization Cost Principles (Revised § 200.401(c); removal of Appendix VIII to Part 200). The exemption allowing certain nonprofits to operate under for-profit cost principles (48 CFR 31.2) will be limited to nonprofits that either (1) receive 90% or more of their federal funding through contracts, or (2) operate a Federally Funded Research and Development Center (FFRDC).
• Indirect Cost Rates (Revised § 200.205(b)(3); § 200.414). Notably, the proposed rule does not change the indirect cost rate negotiation system. This marks a retreat from the Administration’s earlier efforts to curtail indirect cost rates, although OMB indicates it may issue a request for information on this topic in the future. Revised section 200.205(b)(3) requires that as a final tiebreaker, discretionary awards should favor institutions with lower indirect cost rates.

Practical Implications for Clients

• Recipients with fixed-rate awards and pass-through entities that issue fixed-rate subawards should evaluate their capacity to manage cost-reimbursement awards.
• Recipients should review budgets for upcoming and existing awards to identify costs that may become unallowable or may now require prior approval.
• Nonprofits previously exempt from Subpart E cost principles should assess whether the narrowed exemption will require a transition to different cost accounting practices.
• All recipients (in particular institutions of higher education and research organizations) should monitor for future regulatory activity on indirect cost policy.
• Recipients may wish to consider benchmarking their indirect rate against grant competitors.

Policy-Based Funding Restrictions (Jump to top)

The rule restricts awards based on the “National Policy Requirements” through several provisions which restate known Administration policy priorities. The rule will (1) prohibit funding that supports DEI and will (2) restrict international collaboration. Although broadly worded, the provisions are tied to the awards themselves. An organization’s internal processes and initiatives unrelated to the award should not be affected in principle, though disentangling them may prove challenging and this principle has not specifically been tested yet. But the proposed rule would enshrine anti-DEI policy in federal regulation, and establish government-wide restrictions on the use of federal funds for collaborations with foreign adversaries and covered foreign entities, extending beyond the narrow statutory restrictions that currently apply only to certain agencies. In both cases, these executive branch policies would become more permanent as compared with executive orders (the latter of which a new administration could summarily revoke).

Key restrictions include:

• U.S.-Based Recipients (New § 200.202(e)). Research and development awards must be made to entities organized under U.S. law. International elements may be included only if justified by the agency as consistent with program objectives and the national interest.
• Non-English Language Use Restricted (New § 200.111). “All documents, communications, and materials produced with Federal funds shall be in the English language, unless a non-English translation is specifically authorized by statute or required to provide meaningful access to individuals with limited English proficiency.”
• Disparate Impact Redefined (New § 200.218). New section 200.218 oddly prohibits awards related to “disparate impact,” an apparent attempt to codify prior attempts to neutralize a part of Title VII, including EO 14281 (discussed previously).
  • It states that funding should not support disparate-impact studies or litigation, and prohibits “Federal award activities based on the assumed risk of disparate-impact liability.” While unclear what “activities based on” refers to, this provision appears to target activities designed to comply with Title VII’s disparate impact provisions. It is unclear how many awards this would actually affect.
  • The proposed rule defines disparate impact in a manner facially inconsistent with Title VII doctrine, defining the theory as one under which discrimination occurs when: “a facially neutral policy or practice (for example, a merit-based employment policy or practice) gives rise to an automatic or near-insurmountable presumption of the existence of unlawful discrimination on the basis of federally protected characteristics (such as race or sex) where there are any differences or disparities in outcomes (for example, disproportionate effects) among different races, sexes, or similar groups.”
• Viewpoint Neutrality at Events (New § 200.219). “Prohibition of Discriminatory Event Services” requires that recipients providing meeting space, catering, security, or other event services make such services available “on a viewpoint-neutral basis” and not “deny, condition, or limit access to such services based on the viewpoint expressed or to be expressed at an event.” Though doctrinally distinguishable, this new rule creates uncomfortable tension with the Supreme Court’s recent decision in 303 Creative LLC v. Elenis, 600 U.S. 570 (2023), in which a web designer was expressly permitted, under the First Amendment, to engage in viewpoint-based discrimination.
• Prohibition on Covered Foreign Collaborations (New § 200.220): Federal funds may not be used to support bilateral or multilateral collaborations, agreements, programs, or activities with "covered foreign countries" or "covered foreign entities," regardless of whether the funds are used for direct programmatic activities, research, technical assistance, travel, or indirect costs.
  • Covered foreign countries include those designated as foreign adversaries, countries of particular concern, or countries subject to national security-related sanctions.
  • Covered foreign entities include those owned or controlled by covered foreign countries, identified on federal "entity of particular concern" lists, or affiliated with foreign military or intelligence services.
  • Exceptions may be authorized where expressly permitted by federal statute or where the agency head determines the activity does not pose a national security risk and is in the national interest. The prohibition does not apply to collaborations funded by non-federal funds.

• Agencies and Pass-Through Entities Bound to “National Policy Requirements” on DEI and Faith-Based Organizations (New § 200.300). Agencies (and grant recipients that pass through funding to sub-recipients) must adhere to “national policy requirements” (the focus of which is eliminating DEI) in award decisions. Additionally:

• A new section (c) highlights faith-based organizations, specifically prohibiting funding recipients from discriminating against faith-based organizations in the selection of subrecipients or in making subawards, echoing Executive Orders from previous Republican administrations (EO 13279, 2002; EO 13831, 2018).
• The proposed rule does not resolve the inherent tension between the provision protecting faith-based organizations that enjoy statutory exemptions allowing discrimination consistent with their religion on the one hand, and the provisions requiring nondiscrimination and viewpoint neutrality on the other hand. If funds are withheld from a faith-based organization because it discriminates against protected groups—as otherwise required by the updated rules—would this be a violation of the “non-discrimination against faith-based organizations” required by 200.300(c)?

Practical Implications for Clients

Risk must be assessed in the context of each organization, but relevant preparations may include:

• Review events policies to assess viewpoint-neutral application (speaker selection, vendor selection, etc.); document the legitimate, viewpoint-neutral bases for any decisions regarding facility access or event support, and train staff on the distinctions.
• Universities and research institutions with international partnerships should assess whether existing or planned collaborations involving federal funds could implicate the new prohibition.
• Recipients subject to Section 117 of the Higher Education Act should ensure reporting is current, as noncompliance may be a factor in risk assessments.
• Before making expensive, difficult-to-reverse changes to programs in response to federal pressure, consult appropriate legal and strategic advisors, as “overcompliance” and hasty changes may waive potential constitutional defenses (e.g., the viewpoint neutrality provisions may provide affirmative defenses if the government targets lawful DEI programming that constitutes protected speech).

Next Steps (Jump to top)

While some organizations are considering rejecting federal funds altogether, many rely too heavily on federal funding to do so and must take note. The comment process and later litigation will discern whether the rule comes into force, and whether its provisions are ultimately constitutional. Preemptive or overcautious compliance—particularly from unaffected organizations who do not receive federal funds under this title, also carry risk. Next steps:

• Submit Comments: Interested parties can submit comments or concerns about any part of the rule. Comments must be submitted electronically to www.regulations.gov under docket OMB-2026-0034 by July 13, 2026. Each comment should reference the specific regulatory section addressed.
• Review Proposed Rule Contextually: Organizations should first review the rule to see if and the extent to which they are affected; affected organizations should take the time to understand the rule itself as applied to the awards in question—including its areas of ambiguity, likely unconstitutionality, and likely inconsistent / underenforcement—not simply the rhetoric.
• Conduct Internal Assessment: Organizations should evaluate current and proposed programs, policies, and procedures affected by the federal award in view of the numerous proposed changes.
• Review Existing Awards and Subawards: Recipients should review the terms of existing awards and anticipate that new awards will incorporate the proposed provisions upon finalization. Because the rule affects what the grant funds are used to support, organizations should review their existing internal controls to determine whether adjustments are needed to separate any federal funds in new grants from internal organizational initiatives that may not be reflective of the “President’s policy priorities.”
• Prepare for Operational Changes: Recipients should begin planning for the compliance items that are relevant to their organization, such as E-Verify enrollment, enhanced subaward tracking and SAM.gov reporting, and revised budget practices to accommodate new prior approval requirements and cost restrictions.
• Monitor for Future Developments: OMB will consider public comments and issue a final rule. The provisions of the final rule are proposed to be severable, meaning that a court invalidation of one provision would not affect the remainder.