Key Takeaways

  • The Office of Management and Budget (OMB) proposed sweeping revisions to the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards that, among other changes, would prohibit the use of federal funds to support DEI policies that violate federal anti-discrimination laws.
  • The proposed rule introduces a broad discretionary termination provision, modeled after the FAR’s termination-for-convenience clause, that would allow agencies to terminate awards that no longer advance “agency priorities or the national interest.”
  • New oversight measures include mandatory E-Verify participation, expanded conflict-of-interest disclosures, pre-issuance review criteria under which the government will evaluate applicants’ civil-rights compliance and foreign affiliations, and enhanced subaward reporting on SAM.gov.
  • Comments are due 45 days after publication in the Federal Register July 13, 2026, with OMB targeting an ultimate effective date of October 1, 2026.
  • Organizations receiving federal funding should continue to review DEI-related programs and policies, assess internal controls, and evaluate the impact of the expanded termination authority on current and future awards.

On May 29, 2026, the Office of Management and Budget (OMB), joined by more than 40 federal agencies, published a sweeping proposed rule that would revise the government-wide Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (2 CFR part 200). The proposed rule is the most significant overhaul of federal grants management policy in over a decade, with direct implications for federal grant recipients and subrecipients, including research and development firms, startups, universities, nonprofits, and state and local governments. OMB is targeting an effective date of October 1, 2026, with comments due 45 days after publication in the Federal Register (i.e., July 13, 2026).

This alert summarizes the key provisions of the proposed rule, analyzes the practical implications for organizations that receive federal financial assistance, and outlines recommended steps for compliance.

Background

The proposed rule implements key Trump Administrative policy directives arising out of Executive Order 14332, “Improving Oversight of Federal Grantmaking” (August 7, 2025), which instructed OMB to revise Title 2 of the Code of Federal Regulations to improve transparency, accountability, and oversight of federal awards, and to ensure that discretionary grants permit termination for convenience. The proposal builds on a series of earlier executive orders—including EOs 14151 (Ending Radical and Wasteful Government DEI Programs and Preferencing (January 20, 2025)); 14173 (Ending Illegal Discrimination and Restoring Merit-Based Opportunity (January 21, 2025)); and 14281 (Restoring Equality of Opportunity and Meritocracy (April 23, 2025))—and DOJ guidance from March and July 2025 addressing unlawful discrimination by recipients of federal funding.

OMB has stated that the proposed revisions are driven by three principal objectives: (1) improving transparency, accountability, and oversight for the use of federal taxpayer dollars; (2) clarifying the regulatory status of Title 2 of the Code of Federal Regulations as a binding OMB regulation (rather than mere “guidance”); and (3) reducing recipient burden.

Key Provisions

Prohibition on Unlawful DEI Activities

The most significant substantive change is a proposed revision to 2 CFR § 200.300, which would prohibit the use of federal award funds to “fund, promote, encourage, subsidize, or facilitate” certain specified activities.

First, the proposed text would prohibit the use of federal award funds to support unlawful DEI or DEIA policies, principles, or practices that violate any applicable federal anti-discrimination laws, including racial preferences or other forms of racial discrimination, and activities where race or intentional proxies for race are used as a selection criterion for employment or program participation.

Second, the provision would bar the use of federal funds to promote or support gender ideology as defined in EO 14168.

Third, it would prohibit funding the “transition” of a child under 19 years of age from one sex to another, to the extent such activities are not expressly authorized by federal statute.

Fourth, the provision would prohibit the use of federal award funds to assist, provide, or facilitate access to abortion, except as expressly authorized by federal law.

The proposed text applies “to the maximum extent permitted by law” and directs both federal agencies and pass-through entities to ensure compliance. OMB states that the prohibition is intended to track existing federal anti-discrimination statutes, including Title VI and Title VII of the Civil Rights Act of 1964, as interpreted in light of the Supreme Court’s decision in Students for Fair Admissions Inc. v. President & Fellows of Harvard Coll., 600 U.S. 181 (2023).

Prohibition on Disparate-Impact Liability

The proposed rule would establish a new 2 CFR § 200.218,which would direct agencies to “eliminate the use of disparate-impact liability in all contexts relevant to Federal awards.” Under this term, federal agencies and pass-through entities would be required to ensure that awards are not used in support of disparate-impact studies, disparate-impact litigation, or other related activities, and must not issue terms and conditions that promote or support the use of disparate-impact liability. Recipients and subrecipients would likewise be prohibited from adopting or enforcing disparate-impact liability standards in administering federally funded programs. The proposed rule would allow a limited exception under which recipients would be allowed to conduct statistical or demographic analysis for internal use, provided that federal award funds are not used for conducting such analysis and the results are not applied to activities under the award.

The proposed definition of “disparate-impact liability” includes a theory under which a facially neutral policy gives rise to an automatic or near-insurmountable presumption of unlawful discrimination based on federally protected characteristics if there are any differences or disparities in outcomes among different groups.

Expanded Discretionary Termination Authority

The proposed rule would also significantly expand the grounds for terminating federal awards by adding a broad discretionary termination provision, modeled after the FAR’s termination-for-convenience clause. Under this provision, federal agencies would be able to terminate awards if such award “no longer advances Federal agency priorities or the national interest.” All discretionary awards would be required to include the discretionary termination provision unless doing so would conflict with a federal statute. Statutory entitlements—including block grants, formula-based awards, and disaster recovery grants—would be exempt from this requirement.

OMB also proposes a new temporary suspension authority, similar to the FAR stop-work order, under which agencies could issue written orders halting work under a federal award. Together, the termination and suspension provisions represent a significant expansion of federal agency discretion over the lifecycle of grant awards.

Strengthened Oversight and Transparency Measures

The proposed rule would introduce and/or expand numerous oversight mechanisms within the federal award or subaward lifecycle. Among other things, with respect to mandatory disclosures under 2 CFR § 200.113, the proposed rule would require recipients and subrecipients to promptly disclose credible evidence of violations of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations, as well as civil False Claims Act violations. As to conflict of interests, the revised 2 CFR § 200.112 would require recipients to disclose whether any employees who worked on the proposal or will support the resulting award were employed by the awarding federal agency within the preceding two years.

At the pre-issuance review stage of an award under the proposed revisions to 2 CFR § 200.204, agencies would be required to consider a range of factors when evaluating applicants for discretionary awards, including whether the (1) applicant’s activities are inconsistent with federal civil rights laws, and (2) applicant has affiliations with organizations that violate federal law or undermine national security.

The proposed rule would also establish a new 2 CFR § 200.219, which, in turn, would prohibit certain discriminatory event services, requiring public entities that receive federal assistance to refrain from discriminating based on the viewpoint, content, or subject matter of speech—including on the basis of political, ideological, or religious affiliation—in providing services for events, meetings, or other expressive activities. This requirement is intended to ensure that public entities do not improperly use control over facilities or services to disadvantage or suppress the speech of disfavored groups.  The proposed text further provides that it applies regardless of whether an event is directly funded by the Federal award if it occurs on property or facilities under the control of the public entity.

Finally, a new 2 CFR § 200.303 would impose a new E-Verify participation requirement on federal funding in recipients and subrecipients, mandating that such entities participate in DHS’s E-Verify program and confirm the employment eligibility of all employees  hired under a federal award and to flow such terms down to subcontractors.

Restrictions on Foreign Collaborations and National Security

Next, the proposed rule would also restrict research awards to entities organized under the laws of the United States, a state, or tribal government, with limited exceptions. To that end, federal agencies would be required to apply a “domestic-first framework” for research programs and would be prohibited from issuing awards for research to foreign entities except where expressly authorized by statute or where a compelling national interest exists.

Cost Principles and Indirect Costs

In addition, the proposed rule includes several notable changes to the cost principles under subpart E of 2 C.F.R. part 200. Under the proposed revisions, the following costs would be unallowable:

  • All advertising and public relations costs, with limited exceptions for costs required by statute or where such costs are necessary for procurement and program outreach;
  • Publication costs, to include article processing charges and open access fees, unless specifically required by statute or approved in advance by the agency on a case-by-case basis;
  • Conference attendance costs, unless participation is expressly approved by the awarding agency and included in the terms and conditions of the award;
  • Costs of memberships and subscriptions in professional organizations, absent prior written approval from the agency; and
  • Voter registration campaigns or issue advocacy unrelated to the statutory objectives or performance requirements of the award.

Notably, OMB is not proposing changes to the indirect cost rate negotiation system in this rulemaking, although it acknowledges ongoing congressional interest in the topic and notes that it may issue a separate request for information in the future.

Remedies for Noncompliance

The proposed rule clarifies and consolidates available remedies, which would include temporarily withholding payments, disallowing costs, suspending or terminating awards, initiating suspension or debarment proceedings, withholding further federal funds, and pursuing other legally available remedies. Agencies would also, at their discretion, be authorized to cooperate with individuals or organizations pursuing private causes of action based on a recipient’s failure to comply with federal requirements.

Practical Implications

Colleges and universities continue to face significant compliance obligations under the proposed rule. Institutions should continue to review existing DEI programs, admissions, training initiatives, hiring practices, and grant-funded activities to ensure that no program or practice involves the use of racial preferences, disparate-impact methodologies, or other practices that violate federal anti-discrimination laws. The requirement to apply a “domestic-first framework” for research awards will also impact institutions with significant international collaborations, potentially limiting the scope of federally funded projects that involve foreign entities or performance outside the United States.

Nonprofits and state and local governments should anticipate enhanced agency scrutiny over the alignment of award activities with “agency priorities and the national interest.” The expanded discretionary termination and suspension provisions would create new uncertainty for long-term projects, particularly those in which the policy environment may shift over the course of a multi-year award. Grant-funded activities involving viewpoint-based restrictions on events, voter registration drives, or public messaging campaigns unrelated to statutory award purposes would face heightened compliance risk.

Organizations that hold both federal contracts and grants should be aware that the proposed rule’s DEI prohibitions track closely with the requirements under Executive Order 14398 (March 26, 2026), which imposed similar restrictions and a mandatory contract clause in the federal procurement context. Compliance programs should be integrated across procurement and assistance portfolios to ensure a consistent approach to nondiscrimination requirements.

Enforcement Mechanisms. The proposed rule codifies several enforcement tools that recipients and subrecipients should carefully evaluate. For example, award termination for noncompliance would be reported in SAM.gov and the information would remain available to other federal agencies for a period of five years, during which agencies considering new awards must take the termination into account. Discretionary termination, by contrast, would not trigger administrative hearing rights, although agencies would be required to provide written notice with a brief summary of reasons for the termination. Federal agencies would also be expressly permitted to initiate suspension and debarment proceedings for violations.

In a notable addition, the proposed rule would authorize agencies to cooperate, at their discretion, with individuals or organizations pursuing private causes of action and civil remedies (such as under the qui tam provision of the False Claims Act) based on a recipient’s failure to comply with federal requirements. However, the proposed rule expressly states that it does not create any private right of action.

Timeline

  • Publication: May 29, 2026
  • Comment period: July 13, 2026 (45 days from publication)
  • Proposed effective date: October 1, 2026

Recommended Next Steps

Organizations that receive federal financial assistance—whether as direct recipients, subrecipients, or pass-through entities—should consider the following actions.

First, organizations should continue to review existing DEI programs and policies to assess whether any activities funded or conducted in connection with federal awards could be characterized as involving protected characteristics such as race or sex, disparate treatment, or disparate-impact methodologies. Additionally, an organization should review and address how it defines sex including for purposes of sex discrimination. Where an organization determines that certain DEI-related activities should continue, it should document the business rationale and legal basis for those activities to demonstrate compliance with applicable nondiscrimination laws.

Second, organizations should be prepared to assess internal controls under 2 CFR § 200.303 to ensure that policies and procedures are updated to address the new requirements, including E-Verify participation, expanded conflict of interest disclosures, and mandatory disclosure obligations.

Third, organizations should evaluate the potential impact of the expanded termination provisions on existing and future awards, considering whether current projects could be viewed as no longer advancing “agency priorities or the national interest,” and develop mitigation strategies accordingly.

Fourth, organizations should review subrecipient and contractor arrangements to ensure that flow-down provisions align with the new requirements—particularly the DEI and nondiscrimination provisions—and establish monitoring protocols for ongoing compliance.

Fifth, organizations are encouraged to submit public comments during the 45-day comment period to address any provisions that may create operational ambiguity, impose undue burden, or require further clarification. OMB has specifically requested input on whether additional discussion or elaboration would be helpful regarding the scope and application of the DEI provisions.

Finally, organizations should monitor agency implementation closely, as individual agencies will issue conforming changes to their respective adopting regulations in 2 CFR Subtitle B.

We anticipate that all such changes will be applicable on a go forward basis (i.e., as to new funding agreements), although the proposed rule does not specifically state that the Administration will not seek to impose such terms on preexisting awards.

Looking Ahead

The proposed rule may face legal challenges. Ongoing litigation over the administration’s earlier executive orders restricting DEI practices in federal contracting—including the Fourth Circuit’s March 2025 decision allowing key provisions of Executive Order 14173 to proceed—provides context for how courts may evaluate the boundaries of executive authority in this area. Organizations should also consider that OMB’s interpretation of existing anti-discrimination laws in this rulemaking represents a significant policy shift from prior administrations.

For questions about this proposed rule and its implications for federal financial assistance, DEI compliance, or grant management, contact the authors or members of the firm’s Government Contracts, False Claims Act, or Higher Education teams.