Defense contractors would be barred from buying back their stock in a bill approved by a Senate panel

The Senate Armed Services Committee has approved a must-pass bill that includes a provision that would prevent certain defense contractors from buying stock or paying dividends unless they have the approval of the Department of Defense.

The measure, an annual bill known as the National Defense Authorization Act, was approved 18-9 in a closed committee meeting last week. The inclusion of the stock buyback provision in the committee bill greatly increases the chances of it becoming law and sets off a potential sea change in how the Pentagon deals with some of the nation’s biggest businesses.

Its bipartisan nature also underscores how Republicans under President Donald Trump have abandoned some of their free-market orthodoxy in favor of interventionist Democrats. The authority is expected to face difficult problems from the companies it will work in, such as Lockheed Martin, Northrop Grumman again Boeing.

Sen. Elizabeth Warren, D-Mass., a member of the committee, helped secure the measure’s inclusion in the committee bill. In an interview, he said it was intended to “bring a little discipline to these defense contractors who have been running for years.”

“These giant contractors are buying their shares just for the purpose of increasing the stock price and improving the pay of the company’s executives,” he said. “The limitation in the NDAA is that if you’re a company that doesn’t even do your government contracts, you can’t do that.”

A provision in the bill, Section 815, would specifically prohibit the Pentagon from entering into contracts with a contractor unless the contractor agrees in writing not to “purchase the equity security of that entity, or any parent entity of that entity, listed on a national securities exchange” or “pay dividends or make any other part of the distribution of the entity.”

The provision would take effect on June 15, 2027. The defense secretary could agree to waive the limit if the contractor provides a “reasonable defense investment plan.”

The Pentagon would be required under the bill to begin a review process to determine which contractors are violating the provision by engaging in stock buybacks or paying dividends without waivers. Subcontractors may be in violation if they “do not perform well in terms of prioritization, investment, or production.”

Contractors who violate the law may be subject to a number of penalties for non-compliance, including suspension of contract payments and loss of eligibility for competitive contracts and grants.

Sen. Jack Reed, DR.I., ranking member of the Senate Armed Services Committee, said the provision was included in the NDAA in two phases.

“It was generally bipartisan,” he told CNBC. “We establish contract requirements and when they can’t meet them, turning around and buying stock instead of reinvesting in their production facilities and other aspects is wrong.”

When asked if he thinks this measure will be successful in the discussions of the House, he said he hopes that the lower council will “know” that “if we sign the contract, we expect it to be fulfilled.”

The measure is likely to get a significant amount of Republican support. Earlier this year, Trump signed an executive order barring defense contractors from buying stock or paying dividends, making it more difficult for Republicans to oppose it.

Sen. Rick Scott, R-Fla., who sits on the committee, offered his support during an interview with CNBC on Tuesday.

“If you’re making money through the federal government, you shouldn’t be giving returns to shareholders before we do our own thing,” said Scott, a former chief executive of a publicly traded healthcare company.

The passage of text on the NDAA comes from Warren’s bill, the “Military Defense Contracting Act” and Sens. Josh Hawley, R-Mo., and Mike Lee, R-Utah, would both block buybacks and pay dividends.

Sen. Tim Sheehy, R-Mont., another member of the Armed Services Committee, gave a thumbs up when asked about the provision on Tuesday. Sheehy’s office did not respond to a request for comment on the context of his beating or how he felt about the measure.

The House of Representatives did not include the stock buyback and dividend provision in its version of the NDAA. Rep. Chris DeLuzio, D-Pa., withdrew the amendment to add it, citing procedural issues when the House Armed Services Committee approved its version of the measure, but it could be included in a later amendment or after final negotiations between the House and Senate.

Still, there is expected to be resistance to the measure, which would be unusual access by the federal government to private business operations. The Pentagon does business with tens of thousands of contractors, meaning that business results can be widespread.

Major trade associations representing defense contractors unanimously opposed it, warning it would amount to unprecedented access to the market by the government.

The US Chamber of Commerce wrote a letter to the House of Representatives, saying it “respectfully but strongly opposes any such legislative efforts.”

“Decreased stock price volatility, financial stability in developed markets, lower transaction costs, and greater stability for retail investors during periods of market turbulence are proven benefits of buying stocks,” the Chamber wrote in the letter. “Legislative restrictions on this practice represent a misguided and unnecessary intrusion into free market mechanisms and will not address the fundamental challenges that the Executive Order seeks to address.”

The Aerospace Industries Association also opposes the measure.

“Funding tools like budgets and procurement are critical to attracting private capital that supports innovation, productivity, and workforce growth in the defense sector,” said Eric Fanning, the group’s President and CEO, in a statement sent to CNBC. “Unnecessary restrictions will make the industry unable to compete for investment, reducing the flow of capital at a time when policymakers are aiming to expand the industrial base.”

“In the long run, that will undermine the very market policymakers are trying to strengthen – undermining both economic growth and national security. We urge the Senate to reconsider,” he said. Fanning is a former Secretary of the Army.

Warren said he hopes the measure will survive, but noted that knives will come out as a result.

“It’s a very popular arrangement, but I never kid myself, lobbyists go out of business to protect the defense industry,” he said. “There’s not the same kind of lobbying power to protect the US taxpayer, so we’ll see.”