At a Glance
- OMB’s proposed rule would require senior political appointees to conduct “pre-issuance review” of every discretionary grant, explicitly reducing the role of peer review and mandating that awards “demonstrably advance the President’s policy priorities.”
- Federal agencies would gain authority to terminate or suspend active discretionary awards at any time based on agency “interest,” mirroring “termination for convenience” provisions contained in the Federal Acquisition Regulation.
- The proposed rule would also incorporate cross-cutting prohibitions on DEI-related activities, “gender ideology,” disparate-impact liability theories, and collaboration with covered foreign entities into all federal awards, while significantly narrowing allowable costs for publication, conferences, memberships, and public communications.
- Public comments on the rule are due by July 13, 2026.
On May 29, 2026, the Office of Management and Budget (OMB) published a proposed rule in the Federal Register that would fundamentally alter government-wide policies governing federal grants, cooperative agreements, and other forms of financial assistance. The proposed rule, issued jointly with dozens of federal grantmaking agencies, would amend provisions under Title 2 of the Code of Federal Regulations (CFR) and agency-specific regulations in 2 CFR Subtitle B, affecting virtually every federal agency that makes financial assistance awards. Since January 2025, federal agencies have terminated thousands of grants and funding vehicles and have faced significant lawsuits and legal challenges in doing so. The proposed rule would further those efforts to exert greater federal control over grants and federal financial assistance. Public comments on the rule are due by July 13, 2026, and the finalized rule is proposed to take effect on October 1, 2026.
Notably, although the current provisions in the Uniform Guidance at 2 CFR Part 200 are commonly incorporated into the majority of federal awards, the proposed rule would reclassify OMB’s government-wide requirements in 2 CFR Subtitle A from “guidance” to a binding “OMB regulation” (i.e., the “Uniform Grants Regulation”). If enacted, the proposed rule would eliminate the prior framework under which individual agencies had flexibility to adopt OMB’s Uniform Guidance through their own implementing regulations and would assign a level of discretion to political appointees previously accorded to agencies to define their own needs. Going forward, OMB amendments would apply directly to agencies upon the effective date of OMB’s final rulemaking, without requiring separate agency-by-agency adoption.
This alert summarizes the provisions most likely to affect federal grant recipients, including universities, nonprofits, state and local governments, research institutions, and private-sector entities engaged in federally funded work. We also offer brief practical guidance and considerations for the comment period ahead.
Key Regulatory Provisions
Reporting, Oversight, and Implementation
One of the most consequential changes in the proposed rule is the requirement that senior political appointees conduct a “pre-issuance review” of every discretionary grant before it is awarded. Under proposed § 200.205(b), agency heads must designate one or more senior appointees to review all discretionary awards, applying a set of enumerated principles that include determining whether awards “demonstrably advance the President's policy priorities.”
The proposed rule explicitly provides that peer review recommendations “remain advisory and are not ministerially ratified, routinely deferred to, or otherwise treated as de facto binding by senior appointees or their designees.” Senior appointees are instructed to use their “independent judgment” and must not “routinely defer to the recommendations of others.” Taken together, the new process represents a significant departure from the previous grantmaking model, under which independent expert peer review was the primary mechanism for determining scientific priorities at various federal agencies.
Under the proposed rule, senior appointees would be required to apply a range of principles as part of their pre-issuance review process, including directives that discretionary awards are not be used to fund racial preferences, “denial . . . of the sex binary in humans,” illegal immigration, or “any other initiatives that compromise public safety or promote anti-American values.” Additionally, the proposed rule builds on the concept of “Gold Standard Science,” previously announced in Executive Order 14303, requiring that grants “include benchmarks for measuring success and progress towards relevant goals.” However, the proposed rule does not provide a more detailed definition of “Gold Standard Science,” raising questions about the breadth of how senior appointees may apply this principle.
Expanded Termination and Suspension Authority
The proposed rule significantly expands the authority of federal agencies to terminate or suspend active grants. Under proposed § 200.340(a)(2), agencies would be able to terminate any discretionary grant “in part or its entirety” whenever an agency determines that termination is “in the interest of the [f]ederal agency,” including if the award no longer effectuates “program goals, [f]ederal agency priorities, or the national interest as they exist at the time of the termination.” This language reflects an expansion upon the current termination language, which permits termination “pursuant to the terms and conditions of the [f]ederal award, including, to the extent authorized by law, if an award no longer effectuates the program goals or agency priorities.” In the proposed rule, OMB has framed this provision as analogous to the long-standing “termination for convenience” clause used in federal procurement contracts under the Federal Acquisition Regulation, and it would essentially give the government the ability to terminate funding vehicles for any reason whatsoever.
Critically, the proposed rule does not require a finding of noncompliance or fraud to justify a discretionary termination. Instead, the agency need only provide “a brief summary of the reason or reasons for finding that termination is in the interest of the [f]ederal agency.” Moreover, the proposed rule explicitly provides that agencies are “not required to allow for objections, hearings, and appeals related to any reasons for termination except termination for noncompliance.” As such, the proposed rule would both provide the government with unlimited termination rights and potentially implicate the corresponding due process rights of terminated grantees. The new termination and suspension provisions would also undermine the certainty and consistency associated with grant programs — a critical aspect of grant performance and one that distinguishes federal grants from federal contracts.
The rule also introduces a new temporary suspension authority at § 200.340(e), permitting agencies to issue a written stop-work order for up to 90 days “if the [f]ederal agency or pass-through entity determines that a suspension is in the interest of the [f]ederal agency or pass-through entity.” Although agencies are directed to include both the termination and suspension provisions in the terms and conditions of all discretionary awards, certain programs are excepted from the discretionary termination and suspension provisions, including “[f]ederal awards made under programs where legislation establishes an entitlement to the funds on the part of the recipient, such as block grants, those awarded based on a statutory formula, or disaster recovery grants.” The discretionary termination provision also does not apply to agreements entered into in furtherance of international trade agreements, the CHIPS Act, and the Infrastructure Investment and Jobs Act.
National Policy Priorities and Grant Conditions
Consistent with the administration’s efforts to apply greater scrutiny towards federal grant activities, the proposed rule would embed several cross-cutting national policy conditions into all federal awards through revisions to § 200.300. Specifically, agencies would be prohibited from using federal grant awards to “fund, promote, encourage, subsidize, or facilitate” DEI policies or practices “that violate any applicable [f]ederal anti-discrimination laws,” “gender ideology” as defined in EO 14168, or gender transition for individuals under 19 years of age. Noncompliance with this clause is considered a “material breach” triggering termination. Recipients of federal funding conducting these activities with nonfederal funds could also still face risk if the activity is argued to be “facilitated” by the award itself, potentially expanding the scope of the provision.
A new § 200.218 would also broadly prohibit the use of federal awards to promote or support “theories of disparate-impact liability,” requiring agencies and recipients to eliminate the use of such theories in all contexts relevant to federal awards. The proposed rule would prohibit federal awards from being used “in support of disparate-impact studies, disparate-impact litigation, or other related activities,” and agencies would be directed to ensure “that [f]ederal award activities based on the assumed risk of disparate-impact liability are not allowed.” Recipients and subrecipients would also be prohibited from adopting or enforcing disparate-impact liability standards in administering federally funded programs, raising significant questions about the ability of recipients to conduct scientific and other academic research studies assessing the effects of policies or other phenomena on different demographic groups.
Importantly, these conditions would apply across all agencies and programs as general award conditions, not merely to targeted research grants. Institutions conducting work in these areas with nonfederal funds face risk that agency reviewers could argue federal awards indirectly “facilitate” prohibited activities, underscoring the importance of clear financial separation procedures for federal funding recipients going forward.
Prohibition on Foreign Collaborations
Of particular importance for biomedical companies and other entities in the pharmaceutical space, proposed § 200.220 would bar the use of any federal funds (including indirect costs) for collaboration with “covered foreign countries” or “covered foreign entities,” including foreign adversaries, countries of particular concern, sanctioned nations, and entities owned by or acting on behalf of such countries. Exceptions under this section would require agency-head approval.
This restriction would extend well beyond China and may disrupt longstanding partnerships for companies conducting multisite international clinical trials. Such trials may need to be restructured or funded with nonfederal dollars as a result.
Changes to Grant Structures, Allowable Costs, and Cost Principles
Consistent with a recent executive order affecting federal contracts, proposed §§ 200.201-200.202 would eliminate fixed amount awards and subawards unless otherwise authorized by Federal statute. The proposed rule also makes significant changes to 2 C.F.R. Subpart E (Cost Principles), narrowing or eliminating the allowability of several categories of costs:
- Publication and printing costs (§ 200.461). Publication costs would be unallowable unless expressly required by statute or approved in advance by the federal agency on a case-by-case basis. Despite the role of publication in various research-related grants, the proposed rule states that such costs “are not inherently necessary to carry out the core programmatic objectives of most [f]ederal awards.”
- Conference attendance (§ 200.432). Costs for attending conferences would be allowable “only if participation in the conference is expressly approved by the [f]ederal agency and included in the terms and conditions of the [f]ederal award.”
- Advertising and public relations (§ 200.421). All advertising and public relations costs would be unallowable except those specifically required by statute or for narrow purposes, such as the procurement of goods and services for the performance of the award, the disposal of surplus materials acquired in the performance of the award, or for program advertising and outreach (e.g., recruiting project participants).
- Memberships and subscriptions (§ 200.454). Membership costs in professional, civic, business, and technical organizations would require prior written agency approval and must be necessary to fulfill award requirements. Journal subscriptions would be categorically unallowable under the proposed rule.
- Lobbying and issue advocacy (§ 200.450). The rule expands the definition of unallowable lobbying to include voter registration campaigns, issue advocacy unrelated to the statutory objectives of the funded award, and “[a]ttempting to influence the executive branch of any [s]tate government on matters unrelated to the objectives or performance requirements of the [f]ederal award.”
Notably, OMB explicitly declined to propose changes to the indirect cost rate negotiation system in this rulemaking. However, it stated that it “may consider issuing a request for information on this topic in the future,” and the proposed rule establishes an explicit preference for awarding grants to institutions with lower indirect cost rates and restricts the use of indirect cost funds for publication, certain international activities, and other newly-prohibited categories of costs.
Prohibition on Foreign Collaborations
Beyond policies restricting the types of grant activities that may be funded, the proposed rule introduces several new compliance obligations for recipients:
- Risk-based applicant review (§ 200.206). Agencies are instructed to establish and maintain policies and procedures for conducting a risk assessment to evaluate risks posed by applicants before issuing federal awards, including an applicant’s affiliations with organizations that “violate [f]ederal law, undermine public safety or national security, or advocate for the overthrow of the United States [g]overnment,” as well as compliance with foreign gift and contract disclosure requirements under Section 117 of the Higher Education Act.
- E-Verify (§ 200.303(f)). All federal grant recipients and subrecipients would be required to enroll in and use the Department of Homeland Security’s E-Verify system for every employee and contractor performing work under a federal award. Any final nonconfirmation notice must be reported to the awarding agency.
- Payment justifications (§ 200.305). Payment requests from recipients must include justifications describing the purpose of the payment and the specific award-related work it supports. Federal agencies are also directed to review available data sources with relevant information on the eligibility of federal funding recipients included in the Department of the Treasury’s “Do Not Pay (DNP) System” to verify eligibility prior to making any award payments.
- Conflict of interest disclosure (§ 200.112). Federal funding recipients must disclose whether any employees who worked on the proposal or will support the award were employed by the awarding agency within the preceding two years.
Comment Period and Implementation Timeline
The public comment deadline is July 13, 2026. Comments must be submitted electronically under docket OMB-2026-0034. OMB plans to propose a final rule that will be effective October 1, 2026, which would make the final rule applicable to all new FY2027 awards.
Implications for Federal Grant Recipients
The breadth of the proposed changes poses significant potential challenges for federal grant recipients, including those receiving federal sub-awards. Federal grant recipients should review the proposed rule immediately and consider preparing substantive comments on provisions most relevant to their operations, potentially in conjunction with other similarly positioned entities.
As with other recent executive orders and federal policy changes, federal grant recipients should also evaluate their current policies, programs, and activities against the proposed rule to determine what activities might pose the greatest risks. Where organizational activities implicate prohibited categories, organizations should begin considering how to establish clear financial and operational separation between federally funded activities and those funded by other sources. Federal funding recipients who partner with international organizations should also assess whether those collaborations involve “covered foreign countries” or affiliated entities and determine whether any exceptions might apply going forward.
Key Takeaway
Federal grant recipients should coordinate closely with their agency grant officials in the coming months, particularly as agencies may issue further internal guidance or communications..
For More Information
For further information, you may contact the authors. Faegre Drinker's government contracts and education teams will continue to monitor additional developments, relevant litigation updates, and further agency guidance in the coming weeks.
