Proposed Rule Would Fundamentally Impact Federal Grant and Financial Assistance Framework

On May 29, 2026, the Office of Management and Budget (“OMB”), together with several other federal agencies, published a proposed rule that would fundamentally change many aspects of the regulations in 2 CFR Part 200 governing federal financial assistance awards, including grants, cooperative agreements, loans, and loan guarantees.  The comment period will be underway until July 13.

The 412 page proposed rule states that it is aimed at increasing transparency, accountability, and oversight in federal financial assistance.  It provides examples of “the types of wasteful spending” that it is meant to target, including recipients “potentially misus[ing] funds to provide services for illegal immigrants.”

While the proposed rule contains numerous changes, this post highlights some of the most notable.

2 CFR Part 200, Subpart B:  General Provisions

•  2 CFR § 200.112, Conflict of interest:  The proposed rule would require recipients and subrecipients to disclose — “for informational purposes” — details on whether employees who participated in work on an application or proposal for a federal award, or who are anticipated to work under the award, were employees of the awarding agency in the two years prior to submission of the application.  

• 2 CFR § 200.113, Mandatory disclosures:  The proposed rule would require an agency Office of Inspector General, within ten days of receiving a disclosure under the section, to transmit that disclosure to the United States Attorney’s Office for the District of Columbia.

2 CFR Part 200, Subpart C:  Pre-Federal Award Requirements and Contents of Federal Awards

• 2 CFR § 200.204, Notices of funding opportunities:  Among other things, the proposed change would require agencies to publicly announce NOFOs on Grants.gov for all discretionary awards, rather than only those that will be subject to open competition. 

• 2 CFR § 200.205, Federal agency merit review of proposals:  The proposed change would introduce a “pre-issuance review process” in accordance with Executive Order 14332, “Improving Oversight of Federal Grantmaking,” which we previously covered here.  The review would confirm — among other things — that the award “demonstrably advance[s] the President’s policy priorities,” and “must not be used to fund, promote, encourage, subsidize, or facilitate” “[r]acial preferences or other forms of racial discrimination by the recipient,” “[d]enial by the recipient of the sex binary in humans,” or “[i]llegal immigration.”

• 2 CFR § 200.206, Federal agency review of risk posed by applicants:  The proposed change would broaden the risk factors that agencies can consider when evaluating federal financial assistance applicants, including, among other things, an applicant’s “[h]istory of questionable practices” and “affiliation with organizations engaged in activities that violate Federal law, undermine public safety or national security, or advocate for the overthrow of the United States Government.”

• 2 CFR § 200.211, Information contained in a Federal award:  The proposed change would require that the termination provisions at 2 CFR § 200.340 always be included in awards, either expressly or by reference.  The proposed revised version of 2 CFR § 200.340 is discussed below.

• 2 CFR § 200.218, Prohibition of using Federal awards to promote or support theories of disparate-impact liability:  This new provision would be added in connection with Executive Order 14281, “Restoring Equality of Opportunity and Meritocracy.”  It provides that, “[t]o the maximum extent permitted by law, Federal agencies must eliminate the use of disparate-impact liability in all contexts relevant to Federal awards.”

• 2 CFR § 200.219, Prohibition of discriminatory event services:  This new provision would provide that public entities that are federal financial assistance recipients or subrecipients “must not discriminate on the basis of the viewpoint, content, or subject matter of speech — including on the basis of political, ideological, or religious affiliation or perspective — in providing services for events, meetings, or other expressive activities.”  The provision would also “apply to non-public entities to the extent that the relevant activities are within the scope of activities funded by a Federal award.”

• 2 CFR § 200.220, Prohibition of using Federal funds for covered foreign collaborators:  This new sub-section would prohibit use of federal funds “to support a bilateral or multilateral collaboration, agreement, program, or activity with a covered foreign country or covered foreign entity,” including a “foreign adversary,” “country of particular concern,” and others defined in the proposed regulation.

2 CFR Part 200, Subpart D:  Post Federal Award Requirements

• 2 CFR § 200.300, Statutory and national policy requirements:  Among other things, the proposed revisions would provide that federal grants cannot be used to “fund, promote, encourage, subsidize, or facilitate”:  (1) diversity, equity, inclusion, and accessibility policies; (2) gender ideology; or (3) “the ‘transition’ of a child under 19 years of age from one sex to another.”  The proposed revisions would also provide non-discrimination protections for faith-based organizations.

• 2 CFR § 200.303, Internal controls: This proposed revision would insert a new paragraph (f) that would require all recipients and subrecipients of federal financial assistance to participate in the Department of Homeland Security’s E-verify program “to confirm the employment eligibility of employees and contractors” performing under a federal award.

• 2 CFR 200.320, Procurement methods: This proposed revision would add language that “strongly discourages” recipients from issuing cost-reimbursement contracts.  The revision would require recipients to provide notice to the awarding agency and maintain a written justification for all cost-reimbursement contracts, and it also would authorize (but not require) federal agencies to require recipients to obtain agency approval before entering into cost-reimbursement contracts.

• 2 CFR § 200.322, Domestic preferences for procurements:  The proposed revision would expand the types of projects covered by domestic content restrictions by directing agencies to include terms and conditions in federal financial assistance awards to maximize the use of goods, products, or materials produced in the United States.  OMB reasons that, “[u]nder the current 2 CFR regulatory text, agencies only impose mandatory Buy America requirements for infrastructure grants,” but “this newly proposed provision could require agencies to apply domestic manufacturing requirements for a broader range of grant activities.”

• 2 CFR § 200.332, Requirements for pass-through entities:  This proposed revision would require pass-through entities to “ensure that subrecipients do not take actions that could significantly damage the reputation of the pass-through entity, awarding Federal agency, or the Federal Government.”  If such an action occurs, “the pass-through entity must consult with the Federal agency to determine whether termination of the award is warranted.”

• 2 CFR § 200.340, Termination and suspension:  The discussion of the revisions to this provision are detailed, spanning 14 pages in the proposed rule.  Among other things, the proposed revision would authorize discretionary termination “if a Federal award no longer effectuates program goals, Federal agency priorities, or the national interest as they exist at the time of the termination.”  The proposed revision would also require all federal awards to include a temporary suspension provision authorizing stop work orders.  Certain grants already contain such discretionary termination and temporary suspension provisions, but this rule would make those provisions mandatory in all federal grants unless prohibited by statute.

• 2 CFR § 200.342, Opportunity to object, hearings, appeals:  This proposed revision would provide that federal agencies are not required to provide administrative hearing rights for the discretionary terminations and suspensions described above under the proposed changes to 2 CFR § 200.340.  The current regulations provide grant recipients with hearing and appeal rights to challenge remedial actions resulting from the recipient’s “noncompliance,” and this rule would expressly provide that these rights do not extend to the proposed discretionary terminations and suspensions described above.

2 CFR Part 200, Subpart E:  Cost Principles

• 2 CFR § 200.401, Policy Guide: The current Uniform Guidance permits agencies and pass-through entities to issue “fixed amount” awards up to a certain dollar value (currently $500,000).  As the name suggests, these types of awards are broadly similar to fixed-price procurement contracts; the awardee is entitled to a specific amount of funding and is therefore not required to comply with the cost principles.  The proposed rule, however, would generally permit federal agencies to make such awards only where permitted by statute, and pass-through entities would be entirely prohibited from making such awards.  Corresponding changes would therefore be made to Subpart E and also to 2 CFR §§ 200.201 and 200.333.

• 2 CFR § 200.414, Indirect Costs: One of the most salient features of the proposed rule is what OMB has not proposed to change:  Namely, the existing procedure for the negotiation of indirect cost rates as set forth in 2 CFR § 200.414, pursuant to which indirect rates are negotiated with the Government based on the actual overhead and other indirect costs incurred by the grantee.  Last year, multiple federal agencies, including NIH, promulgated polices that would replace these negotiated indirect rates with a uniform 15% rate.  Those actions were enjoined by reviewing federal courts as inconsistent with law.  OMB could have used this proposed rule to try to reopen that issue, but declined to do so:  The preamble states, “OMB may consider issuing a request for information on this topic in the future,” but further states that “commenters should not submit comments on the indirect cost rate negotiation system in response to this [proposed rule]” (emphasis added).  In any event, the proposed revisions to 2 CFR § 200.205 discussed above would include a provision that — where relevant and consistent with law — “preference for discretionary awards should be given to institutions with lower indirect cost rates,” “[a]ll else being equal.”   

• 2 CFR § 200.477, Abortion: The proposed rule would establish a new cost principle making the costs of “elective abortions” unallowable. 

Recipients of federal financial assistance should continue to closely monitor the status of this proposed rule, both during the ongoing comment period and throughout the rulemaking process.