OMB Unveils Proposed Rule to Restructure Federal Financial Assistance Oversight

On May 29, 2026, the Office of Management and Budget (OMB), together with a broad group of participating federal grant-making agencies, released a proposed rule titled “Regulation for Federal Financial Assistance” to revise the governmentwide requirements in Title 2 governing grants, cooperative agreements and other forms of federal financial assistance. OMB states that the proposal is intended to improve transparency, accountability and oversight; clarify that subtitle A operates as an OMB regulation; and reduce recipient burden. OMB also emphasizes aligning federal awards with “core purposes authorized by law,” curbing what it describes as “wasteful” and “divisive” uses of assistance and restoring closer central oversight of agency grant portfolios.

OMB’s proposed rule would do far more than make technical edits to the Uniform Guidance. It would convert the governmentwide grants framework in subtitle A of Title 2 from “guidance” into an expressly binding OMB regulation, centralize future updates through OMB rulemaking, and tighten front-end and back-end controls across the full lifecycle of federal financial assistance. The proposal targets diversity, equity, and inclusion (DEI) programs, along with “gender ideology,” defining these issues as outside of the potential scope of the federal government’s awards. More broadly, it would embed new governmentwide conditions tied to civil‑rights enforcement, national‑interest determinations, and executive orders issued in 2025 and 2026, and it would expand tools for discretionary terminations and temporary suspensions of awards.

For recipients of federal financial assistance, the practical effect is that compliance would begin earlier, extend further into affiliates and subrecipients, and carry greater consequences if an agency concludes that an award no longer advances program objectives, agency priorities or the national interest. Hospitals, colleges, universities, academic medical centers and other research-intensive recipients are especially likely to be affected because the proposal directly addresses research eligibility, foreign collaborations, section 117 disclosure compliance, payment controls, cost allowability and affiliate relationships. The rule also calls out indirect‑cost policy, hospital cost principles and single‑audit standards as areas of special interest, even where OMB is not yet proposing substantive rate‑setting changes.

Comments are due on or before July 13, 2026. The proposed rule notes that late comments will be considered only to the extent practicable. OMB separately states that it proposes to issue a final rule to be effective by Oct. 1, 2026. This timing is designed so that a single set of governmentwide requirements applies to FY 2027 awards, and OMB expressly invites comment on burdensome or non‑statutory provisions in current 2 C.F.R. that could be revised or removed.

Brownstein is continuing to review the proposed regulations and will circulate a detailed memorandum reviewing the proposal. At this early stage, please note the 10 key proposed policy changes included:

1. Guidance Would Become Mandates. OMB proposes to reframe subtitle A of Title 2 from “guidance” into a directly binding OMB regulation, and future OMB amendments would apply governmentwide on OMB’s effective date without separate agency adoption rulemakings. That is significant because recipients and agencies would have less practical room to treat the Uniform Guidance as soft guidance and would need to monitor OMB rulemaking itself for binding changes.
   
2. Agencies and Pass-Through Entities Could Terminate or Suspend Awards for Discretionary Reasons. Proposed § 200.340 would allow awards to be terminated not only for noncompliance, but also when an agency or pass-through entity determines that termination is in the relevant interest and the award no longer advances program goals, federal agency priorities or the national interest. The proposal preserves notice and a process for recipients to submit termination-cost information, but formal objection, hearing and appeal rights would generally remain tied to remedies for noncompliance rather than discretionary termination or suspension.
   
3. Senior Political Appointees Would Review Discretionary Awards Before Issuance, and Peer Review Would Be Only Advisory. OMB proposes a pre-issuance review in which senior appointees or their designees must independently assess discretionary awards for consistency with law, agency priorities and the national interest. The rule also states that peer review recommendations remain advisory and may not be treated as de facto binding. This is significant because it shifts substantive decision-making authority toward politically accountable leadership and away from conventional expert-review norms that many recipients assume will drive award outcomes.
   
4. Federal Award Funds Could Not Support Unlawful DEI, “Gender Ideology” or Child Gender Transition. Proposed § 200.300 would require agencies and pass-through entities to ensure that federal awards are not used to fund, promote, encourage, subsidize or facilitate DEI or DEIA practices that violate applicable anti-discrimination laws, “gender ideology” as defined by Executive Order 14168, or the so-called transition of a child under 19 from one sex to another. OMB presents these as governmentwide funding conditions tied to authorized public purposes and federal civil-rights enforcement. The same section emphasizes ongoing obligations under RFRA and other religious liberty protections, and notes that agencies and recipients must consider exemptions and accommodations where those laws apply, creating a more complex landscape for program design and implementation.
   
5. Federal Awards Could Not Be Used to Promote or Support Theories of Disparate-Impact Liability. New § 200.218 would bar agencies, pass-through entities, recipients and subrecipients from using federal awards to promote or support disparate-impact liability, including by supporting disparate-impact studies, disparate-impact litigation or award activity driven by assumed disparate-impact risk, unless expressly required by law. The proposal preserves a narrow exception for internal statistical or demographic analysis only if federal award funds are not used for the analysis and the results are not applied to activities under the award. This is especially notable for hospitals, universities and other large institutions that use demographic or outcomes data in compliance, quality-improvement, hiring, admissions, research or program-administration settings.
   
6. Research Awards Would Move to a Domestic-First Model. Proposed § 200.202(e) would generally require research and development awards to go to entities organized under U.S., state or tribal law, with direct awards to foreign entities limited to cases of express statutory authority or a senior-appointee determination. International elements in otherwise domestic projects would have to be affirmatively justified based on scientific need, access to unique resources and national-interest considerations. For universities, academic medical centers and research hospitals, this would materially change proposal strategy, partner selection and the administrative record needed to defend foreign components.
   
7. Federal Funds Could Not Support Covered Foreign Collaborations, Including Through Indirect Costs. Proposed § 200.220 would prohibit recipients and subrecipients from obligating or expending federal funds for bilateral or multilateral collaborations with covered foreign countries or covered foreign entities unless a statutory or agency-head exception applies. The prohibition would extend to direct programmatic activity, research, technical assistance, travel and indirect costs allocable to the collaboration. This is a major national-security and research-governance change because it reaches not only direct foreign awards, but also collaborations embedded inside otherwise domestic awards.
   
8. Applicant Risk Review Would Expand to Section 117 Compliance, Questionable Practices and Certain Affiliations. OMB proposes to broaden applicant-risk review so agencies may consider financial capacity, audit findings, publicly available evidence of questionable practices, memberships or affiliations linked to public-safety or national-security concerns, and compliance with foreign gift and contract disclosure requirements under section 117 where applicable. For higher education institutions, the section 117 reference is especially significant because it makes foreign gift and contract disclosure compliance an express federal-award risk factor rather than only a parallel education-law issue. This change is likely to matter most in competitive awards where agencies can use risk screening to narrow the field before or alongside merit review.
   
9. Recipients Would Have to Use E-Verify for U.S.-Based Award Labor. Proposed § 200.303 would require recipients and subrecipients to participate in the Department of Homeland Security’s (DHS) E-Verify program for employees and contractors hired in or performing work in the United States under a federal award. Final non-confirmations would have to be reported to the federal agency or pass-through entity, together with confirmation that the recipient took appropriate action under E-Verify rules. This is a notable operational and legal compliance change because it adds a new workforce-eligibility overlay to federal financial assistance administration, especially for institutions with decentralized HR functions, foreign researchers or heavy contractor use.
   
10. Merit of Scientific Research Proposals Would Be Subject to the Administration’s Discretion. OMB proposes to revise § 200.205 to strengthen requirements for agency merit review and to establish a new pre-issuance review process consistent with Executive Order 14332. As such, it uses “Gold Standard Science” as the benchmark for grant compliance. Further, the proposal states that agencies must prioritize institutions that have “demonstrated success in implementing Gold Standard Science,” thereby deprioritizing previous benchmarks for institutional accountability. In practice, this could shift competitive advantage toward institutions whose research portfolios align with current executive‑branch definitions of methodological rigor and policy relevance, and away from projects characterized as speculative, non‑replicable or driven by “ideology.” Applicants should consider how to document “Gold Standard” practices in their proposals and institutional narratives.

Brownstein is continuing to review the proposed regulations and will circulate a detailed summary and analysis. Our team is available to assist with preparing, refining or coordinating comments on the proposed rule, including issue‑spotting across your current award portfolio and drafting tailored comment language.

THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING NEW OMB RULES RESTRICTING FEDERAL GRANTS. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.