OMB Rules on Federal Grants: Reviews, Terminations, DEI Bans

The Office of Management and Budget’s proposed rule on federal grants, published May 29, 2026, would rewrite 2 CFR Part 200 — the framework governing roughly $1 trillion in annual federal financial assistance — into a binding regulation, require political appointees to sign off on every discretionary award, give agencies new power to terminate grants mid-stream, and prohibit funding for diversity, equity, and inclusion work along with several other policy areas. Public comments are due July 13, 2026, and OMB has set October 1, 2026 as the target effective date.¹

The 108-page proposal (91 FR 32198–32305) was issued jointly by OMB and dozens of federal agencies, including the departments of Education, Health and Human Services, Energy, and Homeland Security, along with the National Science Foundation and the Environmental Protection Agency. It implements Executive Order 14332, “Improving Oversight of Federal Grantmaking,” signed by President Donald Trump on August 7, 2025.²¹

From Guidance to Binding Regulation

The current text at 2 CFR Part 200 says on its face that it is “guidance, not regulation.” The proposal reverses that. It renames the framework the “Uniform Grants Regulation” and declares it a binding OMB rule with independent legal force. Once in place, future OMB amendments would take effect government-wide on a single date without each agency running its own separate rulemaking.³

The reclassification matters for exposure. If the framework is a regulation, noncompliance could be a regulatory violation, which raises enforcement risk and potential False Claims Act liability for recipients.⁴ Moody’s Ratings has said that because the changes come through formal rulemaking rather than executive order, they would be “stickier” and harder for a future administration to unwind.⁵

Political Appointee Review of Every Discretionary Award

Each federal agency would have to designate one or more “senior appointees” — political appointees — to review all discretionary awards before they are issued. The appointee must verify that each proposed award is consistent with applicable law, agency priorities, and the national interest. Peer review, the traditional mechanism for judging scientific merit, would be strictly advisory; the senior appointee’s judgment takes precedence.⁶⁷

The rule adds risk criteria that let agencies weigh 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 could also deny eligibility based on an applicant’s “history of questionable practices,” a term the proposal does not define.⁷⁸

Broader Power to Terminate and Suspend Grants Mid-Award

A new “discretionary termination” provision, modeled on the “termination for convenience” clause used in federal procurement contracts, would let agencies end an award if they determine it “no longer effectuates program goals, agency priorities, or the national interest.” A recipient in full compliance could still have its grant terminated on that basis.⁷

Administrative hearing and appeal rights would be eliminated for these discretionary terminations. Those procedural protections would remain only when an agency terminates for noncompliance — meaning the recipient actually violated the award. A recipient facing a discretionary termination could still seek judicial review in the U.S. Court of Federal Claims.³

The proposal also creates a 90-day temporary suspension, modeled on the stop-work orders used in procurement, that lets an agency freeze an award when doing so is “in the interest of the agency.” Block grants, formula awards, disaster recovery grants, and certain awards under the CHIPS and Science Act and the Infrastructure Investment and Jobs Act are exempted from discretionary termination.³⁹

What the Rule Prohibits Funding

The proposal bars federal awards from being used to fund, promote, encourage, subsidize, or facilitate diversity, equity, and inclusion policies that the administration characterizes as violating federal antidiscrimination laws. It also prohibits funding that supports what the rule calls “gender ideology,” defined as theories denying biological sex or the sex binary, and prohibits grants related to gender transition procedures for individuals under 19.⁷¹⁰

Several other content-based restrictions appear in the proposed text:

Section 200.218 prohibits using federal awards to promote or support theories of disparate-impact liability.¹
Section 200.219 imposes viewpoint-neutrality requirements for events held on property under a public entity’s control, applicable even when the specific event is not federally funded.¹¹
Section 200.220 establishes a government-wide prohibition on using federal funds for research or collaboration with “covered foreign countries or covered foreign entities,” expanding restrictions that previously focused mainly on China.¹²
Federal awards may not be used for voter registration campaigns, issue advocacy, or public messaging unrelated to the award.¹⁰
Section 200.477 lists elective-abortion costs as expressly unallowable, codifying Hyde Amendment restrictions into the grant framework.¹³

Advertising, commencement, publication, and voter registration costs become expressly unallowable. Conference attendance, fundraising, investment management, membership, and subscription costs would require advance agency approval. Indirect cost funding for scientific journal publications would generally be prohibited unless expressly required by statute or approved in advance case-by-case.¹³⁶

New Compliance Duties for Recipients

The proposal loads several new operational obligations onto recipients and pass-through entities:

All recipients and subrecipients must use the Department of Homeland Security’s E-Verify program for employees and contractors hired to perform work under a federal award.¹³
Non-state recipients must include a written justification with each payment request describing the purpose and specific award-related work being supported.⁹
States must verify payee eligibility through the Treasury Department’s “Do Not Pay” system before disbursing pass-through funds.¹¹
Recipients must certify in performance reports that all subawards have been reported to SAM.gov; failure could be grounds for termination.⁷
Inspectors General must transmit evidence of fraud, conflict of interest, bribery, or False Claims Act violations to the U.S. Attorney’s Office for the District of Columbia within 10 days of receipt.¹³
Recipients must disclose whether anyone who helped prepare the proposal or supports the award was employed by the awarding agency within the prior two years.¹⁴
Fixed-amount awards and fixed-amount subawards are eliminated unless specifically authorized by statute.¹²

On audits, OMB is removing “annual” from the definition of the Compliance Supplement and reassessing how often to issue it. Agencies, Inspectors General, and the Government Accountability Office may impose additional audit requirements only when “expressly authorized by statute.”¹⁴ On internal controls, explicit references to the GAO’s “Green Book” and the COSO framework are removed, and recipients get “reasonable discretion” to establish effective controls.¹³

What the Rule Does Not Change: Indirect Cost Rates

Despite speculation that the rulemaking would cap indirect cost reimbursement at 15 percent — an idea floated in the administration’s fiscal year 2027 budget request — the proposal does not directly change the indirect cost rate negotiation system. OMB stated it is “not proposing updates to the indirect cost rate negotiation system through this document” and instructed commenters not to submit comments on the topic.¹⁵¹⁶

The proposal does add a preference criterion: for discretionary awards, “all else being equal, preference should be given to institutions with lower indirect cost rates.”¹⁵

Who Would Feel It Most

Because the Uniform Guidance reaches every federal grant and pass-through award, the rule touches nearly every recipient sector.

Research Universities and Medical Schools

The Association of American Medical Colleges has said the pre-issuance political review could allow partisan considerations to override scientific recommendations, that broad termination authority creates instability for multi-year research, and that restrictions on conference attendance, publication costs, and international collaborations would impede the normal conduct of science.¹⁶ The Association of American Universities has requested that the 45-day comment period be extended to 90 days and pointed to analyses suggesting the rule could affect roughly 5,000 active clinical trials.¹⁷ Moody’s called the proposal “credit negative for entities with high dependence on competitive federal funding,” and analyst Nicholas Samuels said it adds a “layer of unpredictability” for research universities, nonprofit hospitals, transit agencies, and smaller municipalities.⁵

State and Local Governments

Counties, cities, and towns would face heightened responsibilities around subaward reporting to SAM.gov and pre-payment verification through Treasury’s “Do Not Pay” system.¹¹ The National League of Cities has said the rules could “override local authority”: municipalities would need to write justifications for every payment request, adapt to executive orders that may change mid-grant, and accept that agencies could add or remove grant conditions based on undefined risk factors. The viewpoint-neutrality requirement for events on public property extends to all events on a recipient’s premises, not just federally funded ones, and pass-through entities could be required to terminate subawards if a subrecipient’s public statements are deemed “reputationally harmful.”⁸

K-12 School Districts

All payment requests for federal awards — including routine draws on formula programs like Title I — would require written justifications describing the specific purpose and milestones supported. AASA has warned this would impose “substantial administrative burdens” on districts that rely on federal formula funds for ongoing operations.⁹ The rule would also prohibit using federal grant funds for advertising costs to recruit personnel, potentially affecting districts that use Title I or Title II-A for job fairs and hiring notices. The National Education Association has said the resulting instability would hinder multi-year planning and put programs including school mental health services and literacy initiatives at risk.¹⁸

Opposition and Congressional Response

The National Council of Nonprofits, leading a comment-writing campaign, has characterized the rule as granting the executive branch “seemingly unlimited discretion” to withhold, suspend, or terminate grants without cause or administrative appeals, warning of “unpredictable financial, legal, and reputational risks” that could disrupt housing, healthcare, education, and disaster recovery services.¹⁹ The Alliance for Justice has called the proposal an “assault on diversity, equity, and inclusion” and a “prohibition on issue and election season advocacy” that will have a “damaging chilling effect on nonprofit speech.”²⁰

On June 18, 2026, the leaders of ten major state and local government organizations — including the National League of Cities, the National Association of Counties, the U.S. Conference of Mayors, the National Conference of State Legislatures, and the Government Finance Officers Association — sent a joint letter to OMB Director Russell T. Vought requesting a 45-day extension of the comment period. As of late June 2026, OMB had not publicly responded.²¹

In Congress, Representative Rosa DeLauro of Connecticut introduced an amendment on June 9, 2026, to the fiscal year 2027 Labor, HHS, and Education Appropriations Bill that would have blocked funding for implementation. It did not advance. A Congressional Research Service report noted that Congress could still pass legislation to enact or disallow the proposed provisions, which would supersede the regulation.²²

Legal Vulnerabilities

The threshold legal question is whether OMB has statutory authority to impose a binding government-wide grants regulation at all. A federal district court in National Council of Nonprofits v. OMB (Case No. 1:25-cv-00239, D.D.C.) suggested that 31 U.S.C. § 503, the statute OMB relies on, may not vest the office with authority for this kind of binding regulation. The case is now before the U.S. Court of Appeals for the D.C. Circuit (No. 25-5148); oral argument was held on February 6, 2026, and a decision is pending.²³ Following the Supreme Court’s 2024 decision in Loper Bright Enterprises v. Raimondo, which ended Chevron deference, courts will apply independent judgment on whether OMB is acting within its statutory authority.⁴

Other likely challenges include First Amendment objections to the anti-DEI and viewpoint-neutrality provisions; Spending Clause arguments about whether the government can unilaterally terminate grants absent cause or previously agreed-upon terms; procedural due process claims over the loss of hearing rights for discretionary terminations; and Administrative Procedure Act arguments that the 45-day comment period is inadequate given the scope of the rulemaking. The rule includes a severability clause, so a court striking down one provision would leave the rest in place.⁴

How to Comment and What Happens Next

Comments on Docket OMB-2026-0034 close July 13, 2026, and can be submitted through Regulations.gov. If OMB moves forward on its current schedule, the final rule would take effect October 1, 2026, aligned with the start of federal fiscal year 2027.¹ Whether that timeline holds will depend on how OMB responds to the extension requests, what the D.C. Circuit does in the pending authority case, and whether Congress steps in through appropriations or standalone legislation.

1
Federal Register. Regulation for Federal Financial Assistance
2
The White House. Improving Oversight of Federal Grantmaking
3
Ropes & Gray. OMB Proposed Revisions to the Uniform Guidance: Key Takeaways for Award Recipient Organizations
4
Potomac Law Group. Major Overhaul Affecting Federal Grant Recipients
5
Bond Buyer. Moody’s Warns Proposed Political Review of Grants a Credit Negative
6
Inside Higher Ed. OMB Proposes Rules Establishing Political Review of Grants
7
Holland & Knight. OMB Rule Proposes Significant Changes to Federal Financial Assistance
8
National League of Cities. New OMB Rules for Grantees Could Override Local Authority
9
AASA. New Proposed OMB Rules Would Impact LEAs
10
NAICU. Proposed OMB Rules Would Have Wide-Ranging Effects on Federal Grantmaking
11
National Association of Counties. OMB Proposes Major Overhaul of Federal Grant Rules
12
Wiley Rein. OMB Proposes Sweeping Overhaul of Federal Assistance Regulations
13
Wiley Rein. OMB Calls for More Agency Discretion, New Compliance Mandates in Proposed Grant Overhaul
14
Arizona Governor’s Office of Accountability. OMB Proposes Changes to Uniform Guidance
15
NACUBO. OMB Proposes Major Changes to Federal Grant Rules
16
Association of American Medical Colleges. OMB Proposed Rule to Revise Uniform Guidance
17
Association of American Universities. Resources on Proposed Revisions to OMB Uniform Guidance
18
National Education Association. What the New OMB Grant Overhaul Means for Public School Funding
19
National Council of Nonprofits. Proposed OMB Uniform Guidance Comment Guide
20
Alliance for Justice. Federal Funding: The OMB Rule Proposal That’s Got Nonprofits Talking
21
National Conference of State Legislatures. 45-Day Extension Request for Federal Register Notice OMB-2026-0034
22
Congressional Research Service. OMB Proposed Regulation for Federal Financial Assistance
23
CourtListener. National Council of Nonprofits v. OMB, No. 25-5148