OMB Rule Proposes Significant Changes to Federal Financial Assistance Requirements

The Office of Management and Budget (OMB) and a number of other agencies jointly published a proposed rule in the Federal Register on May 29, 2026, titled "Federal Financial Assistance." The proposed rule makes numerous changes to the guidance governing federal financial assistance (e.g., grants, cooperative agreements, contracts) found in Title 2 of the U.S. Code of Federal Regulation (C.F.R.) and various individual agency regulations. Though some changes are ministerial in nature, a number are significant with ramifications for a wide range of federal funding recipients, including for-profit and nonprofit organizations, state and local governments, research institutions and healthcare providers, among others.

In general, the new proposed changes are described by OMB as 1) improving transparency, accountability and oversight, 2) clarifying regulatory text and 3) reducing recipient burden. The proposed rule rolls back some changes made to 2 C.F.R. Part 200 in 2024 during the final year of the previous administration and adds numerous new prohibitions and restrictions on federal financial assistance, many of which effectuate executive orders (EOs) issued by President Donald Trump. Portions of the preamble are dedicated to chronicling examples of awards made during the previous administration that the current OMB considers wasteful, contrary to or exceeding the scope of statutory authorization, or not in the public interest.  

The proposed effective date is October 1, 2026, and changes would apply to new awards, as well as new incremental funding actions in connection with existing awards, on or after that date. Public comments are due by July 13, 2026.

This Holland & Knight alert discusses some of the more significant proposed changes contained in the rule, with a focus on the impact on for-profit, nonprofit, and public entities and organizations that conduct federal research, engage in federally supported demonstration or commercialization projects, and otherwise rely on federal funding to support their work.

Clarifying Regulatory Status

2 C.F.R. Part 200 is generally considered and identified as "guidance." The proposed rule would change the terminology in all pertinent places with "regulation," codifying what has previously been considered guiding principles for federal grantmaking into binding regulations. The significance of this change would be that properly executed regulations are recognized under the Administrative Procedures Act as having "force of law," whereas guidance is essentially, in this context, instruction for federal agencies on how to carry out their financial assistance responsibilities. This said, the legal significance of existing and proposed policies would be accentuated if the proposed rule is finalized.

A related change in the proposed regulations would stipulate that – in the event of a conflict between the OMB government-wide regulations and an individual agency's regulations – the government-wide regulations would apply to the greatest extent permissible by law.¹ (Proposed 2 C.F.R. 200.101(d)). This change would allow OMB regulations to preempt individual agency practices, centralizing more federal grantmaking powers with OMB.

A Summary of Major Changes

Federal Agency Review of Merit Proposals

Perhaps the most structurally significant change is the introduction of a mandatory pre-issuance political review for all discretionary awards. This new pre-issuance review layer introduces a political checkpoint in the award-selection process.

OMB proposes to revise existing merit review guidance to require senior appointee review before awards are issued. Specifically, senior appointees (or their designees) would oversee and determine whether proposals selected for funding are consistent with applicable law, agency priorities and the national interest. In conducting these reviews, the senior appointees must apply specific principles that include ensuring awards advance the president's priorities, prohibit the use of funds for "discriminatory or otherwise impermissible purposes," and comply with applicable law.

The revisions also encourage agencies to broaden the range of recipients, prioritize institutions demonstrating rigorous and reproducible scholarships, as well as those that incorporate benchmarks for measuring the performance of "gold standard" science (though "gold standard" science is not defined in the proposed rule), creating potential ambiguity in how agencies will apply this standard. The revisions also clarify that peer review is an advisory function and does not replace agency discretion. The subordination of peer review and other forms of subject matter expert evaluation to senior appointee review represents a significant change in existing practices at many agencies (Proposed Revised 2 C.F.R. 200.205).

Review of Risk Posed by Applicants

OMB proposes changes to existing regulations related to matters that agencies may consider when assessing the risk of an applicant. With respect to finances, agencies may consider the applicant's capacity to manage a "high dollar" award in addition to their overall financial stability, as well as an applicant's history of "questionable practices" based on publicly available and verifiable information. Compliance with foreign gift and contract disclosure requirements, including contract disclosure requirements under Section 117 of the Higher Education Act, would also be considered. Finally, OMB is proposing a new provision that allows agencies to consider an applicant's "affiliations 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." Agencies would appear to have broad discretion in interpreting and applying these criteria, and several key terms are not defined in the proposed rule, raising concerns about inconsistent applications across agencies. (Proposed Revised 2 C.F.R. 200.206(b)(2)).

Prohibition on Promoting Disparate Impact Liability

OMB is proposing a new regulatory section that would create a government-wide policy banning federal assistance that promotes or supports "theories that impose disparate-impact liability based on federally protected characteristics such as race, sex, or age." The stated intent of these changes is to reinforce the principle that merit-based opportunity rather than theories of disparate impact liability or "other forms of unlawful discrimination based on race or other protected characteristics – will govern the administration of federal awards." The proposed regulation's definition of "disparate-impact liability" describes it as a theory under which a facially neutral 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 due to differences or disparities in outcomes and irrespective of the absence of discriminatory intent and the provision of equal opportunity. OMB would recognize an exception related to internal analysis by awardees that is not supported by federal funds. (Proposed 2 C.F.R. 200.218). The proposed changes would essentially codify the administration's view on the application of various civil rights laws.

Statutory and National Policy Requirements

OMB is proposing a substantial revision of language to ensure what OMB describes as compliance with the U.S. Constitution, federal statutes and regulations. OMB indicates these proposed changes have been developed in close consultation with the U.S. Department of Justice and are intended to carry out several EOs, including those related to diversity, equity and inclusion (DEI), gender ideology, gender transition and meritocracy. The language specifically calls out protection of free speech and religious liberty and the prohibition of discrimination, with an emphasis on ensuring that no otherwise eligible person will be unlawfully excluded from participation in a federally funded activity.

Additionally, the proposed language stipulates three limitations on the authorized uses of federal award funds. Federal agencies and pass-through entities must ensure that federal awards are not used to "fund, promote, encourage, subsidize, or facilitate" 1) DEI or DEI accessibility policies principles or practices, 2) gender ideology (defined as "theories or ideologies that deny the biological reality of sex or the sex binary in humans, or endorse or advocate for the notion that sex is a chosen or mutable characteristic"), or 3) the "so-called transition" of a child under 19 years of age from one sex to another. Finally, the proposed section includes a specific subsection barring discrimination against faith-based organizations. The discussion of this section of the proposed rule in the preamble is relatively extensive and addresses the rationale for these changes and OMB's view of their legal and constitutional justification. (Proposed Revised 2 C.F.R. 200.300).

The DEI-related restrictions are reflected in other proposed rule changes as well, including in award selection restrictions (Proposed Revised 2 C.F.R. 200.205(b)(2)), elimination of affirmative contracting steps for minority-, women- and veteran-owned businesses (Proposed Revised 2 C.F.R. 200.321), removal of accessibility references in Notice of Funding Opportunity language (Proposed Revised 2 C.F.R. 200.204), and modification of hiring preferences or goals for disadvantaged communities and community‑benefit agreements (Proposed Revised 2 C.F.R. 200.318(l)).

Existing federal award recipients and subrecipients: If/when your existing awards are modified to incorporate these changes, you will need to update your existing procurement policies and practices, subrecipient agreements and contractor flowdowns, among other documents in connection with federal awards.

Termination and Suspension

The proposed rule significantly expands agency authority to terminate and suspend federal awards. In addition to preexisting termination authorities, the proposal would allow agencies and pass‑through entities to terminate awards on the basis of 1) noncompliance, which has been expanded to include failure to report subawards on SAM.gov, and 2) a discretionary "national interest" determination, where the agency determines the award "no longer effectuates program goals, agency priorities, or the national interest" at the time of termination (to the extent permitted by law). (Proposed Revised 2 C.F.R. 200.340(a)). The "discretionary interest" ground is new and extremely broad. It allows agencies to terminate awards based on an assessment that the award does not align with current agency and administration priorities, even if the recipient is in full compliance with all award terms.

The proposed rule also introduces a temporary suspension mechanism. A written suspension order may be issued at any time if the suspension is "in the interest of the agency/pass-through entity." Suspension is generally limited to 90 days unless extended by mutual agreement. The order must direct the recipient to stop covered activities, state the effective date, scope and duration, as well as require reasonable cost-minimization efforts. (Proposed Revised 2 C.F.R. 200.340(e))

The proposed rule provides that after discretionary termination, the agency "may consider" allowing necessary and reasonable post-termination costs, but the decision is at agency discretion and may be weighed against stewardship, program goals, agency priorities or the national interest. (Proposed Revised 2 C.F.R. 200.343) Recipients should not assume post-termination costs will be reimbursed if the rule is finalized as proposed. In addition, the rule would narrow objection, hearing and appeal rights, which would apply only to terminations for noncompliance. (Proposed Revised 2 C.F.R. 200.342) Agencies would not be required to provide objection, hearing or appeal rights for discretionary terminations. This represents a significant reduction in procedural protections for recipients.

Additional Noteworthy Proposed Changes

Prohibition on Discriminatory Event Services: The proposed regulation would ban discrimination in "event services" for public, and in some situations private, funding recipients in order to support "the constitutional prohibition against suppression of the free speech of disfavored groups." In the case of public entities, they could not use their control of facilities to discriminate against certain event speakers. Several examples are delineated, including the use of so-called "hecklers fees" where certain speakers are charged for the cost of additional security. With regard to nonpublic entities, the prohibition would be tailored to the use of the federal funds. (Proposed 2 C.F.R. 200.219).

Prohibition on Use of Federal Funds to Support Covered Foreign Collaborations: OMB proposes a government-wide rule prohibiting recipients from using federal funds to support bilateral or multilateral collaborations, programs or activities with covered foreign countries or covered foreign entities. There is an exception if the activity is authorized by a specific law. The rationale is to ensure that federal financial assistance is not used directly or indirectly to support activities that may pose a risk to U.S. national security. The prohibition would apply regardless of whether the federal funds are used for programmatic activities, research, technical assistance, travel or indirect costs. (Proposed 2 C.F.R. 200.220).

Cost Principles: The proposed rule makes numerous changes to the Subpart E cost principles, including changes to the rules for advertising and public relations costs, conference attendance costs, publication costs, lobbying rules, membership costs and elective abortion costs. Review the proposed rule if these cost principles may impact your project. Also, note that for-profit recipients of federal financial assistance from certain agencies, including U.S. Department of Energy awards, apply the Federal Acquisition Regulation (FAR) cost principles at 48 CFR 31.2, so the proposed rule does not apply to those recipients.

Fixed Amount Awards: The proposed rule eliminates fixed amount awards as a permissible award type, unless otherwise authorized by statute. The elimination is reflected in changes throughout the rule, including in the definitions, various references, and elimination of regulations regarding fixed amount award payment and closeout procedures. Recipients and subrecipients currently operating under fixed amount awards or planning to issue fixed amount subawards should assess whether statutory authority supports continuation and should be prepared to transition to cost-reimbursement structures.

Domestic-First Framework for R&D Awards: Research and development awards must be made to U.S., state or Tribal entities to the extent permitted by law under the proposal. Foreign entities are excluded unless specifically authorized or a compelling national interest determination is made by a senior appointee. (Proposed Revised 2 C.F.R. 200.202(e)).

Reputational Harm Provisions: The rule would require pass-through entities to ensure subrecipients do not take actions causing "significant reputational harm" to the pass-through entity, awarding agency or the federal government. If significant reputational harm occurs, the federal agency may direct subaward termination or terminate the pass-through entity's award. (Proposed Revised 2 C.F.R. 200.332).

Internal Controls: Under the proposed rule, recipients and subrecipients would no longer be required to align internal controls with the Comptroller General's "Standards for Internal Control in the Federal Government" or the "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. (Proposed Revised 2 C.F.R. 200.303).

Procurement Changes: Recipient cost-reimbursement contracts are discouraged under the proposal. Domestic preference language would be strengthened to require award terms maximizing use of U.S.-produced goods. The rule proposes to delete sustainability, recycled‑content and energy-efficiency purchasing requirements. (Proposed Revised 2 C.F.R. 200.320-323).

Subaward Reporting: The proposal would require recipients to confirm in performance reports that subawards during the reporting period were reported on SAM.gov. Failure to report subawards would constitute a basis for termination. (Proposed Revised 2 C.F.R. 200.329).

Indirect Costs: The proposed rule makes no changes in current indirect facilities and administrative cost rules. In the proposed rule, OMB indicates that such changes are prohibited by language contained in enacted fiscal year 2026 appropriations and that no comments on this subject should be submitted.

Conflict of Interest: The proposed regulation would require applicants to disclose whether any employees who worked on a proposal or may support work on a resulting federal award was employed by the awarding agency within the preceding two years. This is not a disqualifying event but information that must be shared with the relevant agency for its consideration in the review process. (Proposed Revised 2 C.F.R. 200.112).

Program Planning and Design: OMB made several changes related to agency "program design" activities. This includes ensuring program goals and objectives align with the public purpose of authorizing laws and are consistent with administration policies and priorities. Additional language underscores the requirement to develop proposals and implement activities in compliance with all applicable restrictions on the use of funds and maintain a focus on the public purpose of the assistance and not "other extraneous activities or initiatives of the recipient organization." Another change would encourage agency use of multiyear awards when consistent with program objectives and law. Additionally, agencies issuing scientific research awards would need to categorize them as basic, applied or experimental development consistent with existing classifications. (Proposed Revised 2 C.F.R. 200.202).

Concluding Observations

If finalized as proposed, these changes would have meaningful implications for all recipients of federal financial assistance. The shift from guidance to binding regulation would elevate compliance risk and could reduce overall flexibility in interpreting and implementing federal requirements. Expanded agency discretion in merit review, risk assessment and award termination would introduce additional uncertainty into funding decisions, as new restrictions related to foreign collaborations, statutory policy requirements and the permissible use of funds could require institutions to revisit existing partnerships, internal policies and program design frameworks. In addition, the proposed rule's emphasis on alignment with administration priorities and national interest may also affect the composition of funded research portfolios, selection of large-scale demonstration and commercial projects, and the criteria used to evaluate scientific merit.

Given the breadth of changes under consideration, there is a significant opportunity for recipients of federal financial assistance to submit targeted comments that clarify operational concerns, particularly regarding the expanded termination and suspension provisions and the pre-issuance political review framework, and ensure that the final rule appropriately reflects statutory intent and long-standing research, development, demonstration and commercialization practices.

Holland & Knight Can Help

Holland & Knight is actively working with and advising clients across research, education, healthcare, energy, transportation and other federally funded sectors on how to respond to the proposed rule, prepare for those potential changes should they be finalized, including assessing current funding streams, identifying areas of legal and operational risk, and developing internal compliance strategies in advance of any final rule. We are also working closely with stakeholders to help ensure that their perspectives are reflected in the rulemaking record, particularly where proposed provisions may create ambiguity, conflict with existing statutory authorities or have unintended consequences for federally supported research, development, demonstration and commercialization projects.

If you have any questions regarding the proposed rule or would like assistance submitting comments, please contact the authors or an industry-specific team member below.

Healthcare and Research Grants: Robert Bradner, Sarah Starling Crossan or Jordan Brossi

Energy Grants: Katherine Hantson, Taite McDonald, Mackenzie Zales or Halley Townsend

Transportation Grants: Kara Fischer

Local Government Grants: Shawna Watley, Michael Galano or Lauri Hettinger

Education Grants: Kalila Hines Winters

Other Agency Grants: David Black, Amy Fuentes, Hillary Freund, Angela Jimenez, Tim Kobes or Chris Nagel

Notes

¹ An OMB financial assistance regulation cannot override an agency regulation that is derived from a statutory requirement.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.