On May 29, 2026, the Office of Management and Budget (OMB), in coordination with other agencies and departments, proposed sweeping changes to the Guidance for Federal Financial Assistance, namely the regulations found at 2 CFR Part 200, commonly referred to as the Uniform Guidance. The proposed rule implements many of the adjustments called for by Executive Order (EO) 14332, Improving Oversight of Federal Grantmaking, including a pre-issuance review from political appointees, and the prohibitions set forth in the series of EOs on diversity, equity, and inclusion (DEI) and gender ideology issued in 2025 and 2026. The proposed rule goes further, however, proposing the elimination of all fixed-price awards and subawards and to elevate the Uniform Guidance from guidance to regulation such that any future notice and comment rulemaking by OMB will have automatic application to Federal grantmaking agencies on the date of OMB’s final rule.

The proposed rule has an established 45-day comment period, with public comments due July 13, 2026. OMB seeks a final rule effective date of October 1, 2026, to be implemented in all new awards and amendments in 2027.

The impact of the proposed rule on grants and other forms of Federal financial assistance will be significant. The proposed rule affects not only the review and approval process, inserting additional review from political appointees before the award of any grant, but also provides Federal agencies with significant discretionary authority to terminate a grant at any time. The proposed rule, which spans more than 400 pages, contains other particularly notable provisions, which we cover in detail below.

Implementing executive orders

As we outlined in our previous alert, EO 14332 directed OMB to revise the Uniform Guidance to provide for termination for convenience and to provide senior appointees to review and approve all new grant awards. As directed, OMB has incorporated both of these directives into the proposed rule.

Termination of grants

The proposed rule amends 2 C.F.R. § 200.340, Termination and Suspension, to provide Federal agencies the allowance to terminate a Federal award at its discretion, including “if a Federal award does not effectuate program goals, Federal agency priorities, or the national interest as they exist at the time of termination.” In a response to the multitude of lawsuits that followed the Trump administration’s attempt to mass terminate grants in 2025 and 2026, the proposed rule specifically addresses “discretionary termination,” separate from “termination for noncompliance,” expanding 2 C.F.R. § 200.430. The proposed rule further amends 2 C.F.R. § 200.341 to provide notice requirements for termination. The revision does not provide a minimum amount of notice required or an appeal process but does require written notice by the Federal awarding agency outlining the reasons that termination is in the interest of the Federal agency, which “may apply to an individual award or class of awards.” Comparable to the termination for convenience clause included in many government contracts (as set forth in the Federal Acquisition Regulation), the proposed changes would provide broad discretionary termination rights to the Federal agency at any point during the grant’s period of performance.

Pre-issuance review

The proposed rule provides significant amendments to 2 C.F.R. § 200.205 (Federal agency review of merit of proposals) which, if finalized, would include a “pre-issuance review” that requires all Federal agencies to designate a senior political appointee to conduct a pre-issuance review of all discretionary awards. The revisions further list the principles that must be considered as part of the pre-issuance review, including:

• Discretionary awards must “demonstrably advance the President’s policy priorities.”
• Discretionary awards may not be used to fund, promote, encourage, subsidize, or facilitate “racial preferences or other forms of racial discrimination,” “denial by the recipient of the sex binary in humans or the notion that sex is a chosen or mutable characteristic,” “illegal immigration,” or, broadly, “other initiatives that compromise public safety or promote anti-American values.”
• Applicants should “commit to complying with administration policies, procedures, and guidance respecting Gold Standard Science.”

Prior to the proposed rule, 2 C.F.R. § 200.205 outlined a requirement for all Federal awarding agencies to establish a merit review process for reviewing applications; the discretion for selecting awards rested in the agency. The proposed rule, if finalized, would not only eliminate a substantial amount of Federal agency discretion, but also insert a political position into the grant review process and an explicit requirement to award grants with political priorities in mind.

Indirect costs

EO 14332 also directed Federal agencies to prioritize discretionary awards to institutions with lower indirect cost rates. Other attempts by this administration to cap indirect rates at a designated percentage have largely been enjoined by various courts (and raised significant opposition from members of Congress from both sides of the aisle). Likely in an attempt to emphasize that this action is different, OMB directly notes in its proposed rule that it is not proposing updates to the indirect cost rate negotiation system. Rather, the pre-issuance review noted above includes, as a required principle, that “all else being equal, preference for discretionary awards should be given to institutions with lower indirect cost rates.”

DEI

In addition to the limitations on discretionary awards outlined in the pre-issuance review, the proposed rule also advances a series of new provisions or modifications to existing provisions aimed at DEI, gender ideology, and “disparate-impact liability”:

• 2 C.F.R. § 200.218: A prohibition against using Federal awards to promote or support theories of disparate-impact liability, which also prohibits Federal agencies, as well as recipients and subrecipients, from using disparate-impact liability in connection with the Federal award or adopting, issuing, or enforcing policies that promote or support disparate-impact liability. Disparate-impact liability is defined in the provision as “a theory under which a facially neutral policy or practice (for example, a merit-based employment 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 (such as race or sex) where there are any differences or disparities in outcomes (for example, disproportionate effects) among different races, sexes, or similar groups.”
• 2 C.F.R. § 200.219: A prohibition against discriminatory event services, which also prohibits public entities from discriminating “on the basis of the viewpoint, content, or subject matter of speech” in providing services for events, meetings, or other expressive activities.
• 2 C.F.R. § 200.300: Covers statutory and national policy requirements and is amended to include additional limitations on authorized use of Federal award funds, including a prohibition on using Federal awards and subawards to fund, promote, encourage, subsidize, or facilitate the following: DEI, gender ideology as defined by EO 14168, or “transition” of a child under 19 years of age from one sex to another as defined in EO 14187.

Additional proposed changes

In addition to the provisions intended to enforce the EOs issued since inauguration, the proposed rule includes amendments intended to enforce other priorities of the current administration, including:

• Eliminating fixed-amount awards and fixed-amount subawards through revisions to definitions found at 2 C.F.R. § 200.201 (awards) and 2 C.F.R. § 200.333 (subawards).
• Underscoring domestic preference; 2 C.F.R. § 200.322 directs agencies “to the greatest extent practicable and consistent with law, to maximize use of goods, products, and materials produced in the United States.”
• Revising the cost principles found at 2 C.F.R. § 200 Subpart E to make certain types of costs unallowable, such as advertising or public relations costs, conferences, or publication costs, without pre-approval from the awarding agency.
• Clarifying that the Uniform Guidance (soon to be renamed the Uniform Grants Regulation) will have “regulatory effect in their own right” such that future notice and comment rulemaking by OMB will have automatic agency-wide application on the date of OMB’s final rule, negating the need for agencies to implement OMB requirements through secondary rulemaking procedures.

Next steps

The proposed rule has an established 45-day comment period, with public comments due July 13, 2026. The rule has already solicited an incredibly strong public response, with more than 14,800 comments to date. Under the Administrative Procedure Act (APA), an agency must generally respond to all “significant comments” received during the rulemaking process. Rules concerning “grants,” however, are exempt from this general procedural requirement. If OMB does not seek to take advantage of this exemption, the agency will not respond individually but the preamble of its final rule will group the comments together by the relevant material points raised by commenters and present the agency’s responses. Even if the rule is generally exempt from notice and comment procedures, OMB cannot completely disregard the comments it solicited. Instead, the general obligation to consider all important aspects of the problem and address relevant material still applies in judicial review. Thus, interested organizations are strongly encouraged to submit comments expressing their views. Judicial review under the APA and standing may be available even to those who have not submitted comments. But an agency’s obligation to respond to or consider comments is limited to the issues raised by commenters. If existing commenters have not adequately presented the issue on which an organization later wishes to base a legal challenge to the rule, it is possible that issue could be foreclosed. Filing a specific, well-supported comment is the best way to reliably ensure that your arguments are preserved and that a record exists to support them.

Conclusion

The proposed rule, if finalized, will have a significant impact on how grants are awarded, terminated, and managed. The proposed rule expands Federal oversight and increases political control over the grant process, both prior to award and during the period of performance. The Trump administration’s priorities focused on prohibiting “illegal DEI” and policies around gender ideology and gender-affirming care will be incorporated into every grant in an expansive way.

Whether the rule will be finalized as written remains a question. The rule has elicited a strong public response, and OMB cannot disregard the large volume of comments to date. Many changes proposed by the current administration have faced legal challenges as well, and given the substantial overhaul proposed, this proposed rule is likely to face similar challenges.

McDermott Will & Schulte’s Government Contracts Group can assist recipients in navigating the impact of the EO and the various changes that it directs to existing rules, terms, and conditions. For more information, reach out to the authors or your regular McDermott lawyer(s).

On March 10, 2026, the US Department of Justice (DOJ) released its first-ever Corporate Enforcement and Voluntary Self-Disclosure Policy (CEP), which is the latest in a series of directives intended to offer a clearer path to criminal declinations for companies that self-report misconduct in a timely manner. The CEP sets out uniform department-wide guidelines for prosecutors’ treatment of self-disclosing corporate parties and reaffirms the DOJ’s emphasis on individual accountability, incentivizing the establishment of robust compliance programs that capture and appropriately escalate reports of misconduct and allow companies to self-report and remediate in a timely manner.

The CEP is divided into three parts, with specific policy prescriptions applying to defined categories of company conduct.

Under Part I, the DOJ provides that it will decline to prosecute a self-disclosing company for criminal conduct in the absence of aggravating circumstances, as long as the company takes the following actions:

• Voluntarily self-discloses the misconduct to the appropriate criminal component
• Fully cooperates with the investigation
• Remediates the misconduct in a timely and appropriate manner

Aggravating circumstances specifically include misconduct of a serious nature, egregious or pervasive misconduct within the company, severe harm caused by the misconduct, or corporate recidivism. However, as detailed below, even where aggravating circumstances are present, the new CEP makes clear that self-reporting misconduct will be rewarded.

Under Part II, the DOJ provides that a Non-Prosecution Agreement (NPA) will be available to a self-disclosing company that fails to otherwise meet the criteria for a declination under Part I – what the DOJ describes as a “near miss” – as long as the company takes the following actions:

• Fully cooperates with the investigation
• Remediates the misconduct in a timely and appropriate manner

As Part II makes clear, an NPA will be the default for a company that is ineligible for a declination because of a near miss in eligibility. And as the policy makes clear, this can occur when the reported misconduct was already known to the DOJ, the company had a preexisting obligation to self-disclose the misconduct, or the company delayed self-disclosing the misconduct for an unreasonable amount of time.

As the policy also makes clear, an NPA may also be available to a company when the presence of “aggravating circumstances” preclude the company from being eligible for a declination.

Under Part III, the DOJ affirms prosecutors’ discretion to determine appropriate criminal resolutions for all corporate entities that are not eligible for a declination or an NPA. But it also directs them to apply a presumption that monetary penalty reductions will be taken from the low end of the Sentencing Guidelines range for companies that fully cooperate and appropriately remediate misconduct in a timely manner.

Key takeaways

• The CEP – which will supplant any other existing policies at DOJ divisions or US Attorney’s Offices nationwide – promotes uniformity, transparency, and fairness in self-disclosure practices and incentivizes responsible corporate behavior.
• The CEP formalizes the DOJ’s increasing movement toward declinations as the default for companies that self-report misconduct in a timely manner, assuming appropriate cooperation and remediation steps are taken. While that trend has been under way, its formalization in the CEP represents a significant shift relative to the DOJ’s historical practices.
• The CEP also reflects the DOJ’s shift away from charging self-reporting companies generally, with Part II making an NPA the default for most companies that fail to qualify for a declination. In particular, the policy makes clear that the presence of aggravating circumstances will no longer mandate criminal prosecution, and companies can now expect to receive an NPA, assuming all other conditions are met, even when the disclosed misconduct is serious, pervasive, or severely harmful or the company is a repeat offender.
• In order to take full advantage of the benefits under the new CEP, companies should prioritize establishing and maintaining effective compliance programs with robust whistleblower protections to ensure that misconduct is reported in a timely manner and appropriately escalated. The CEP’s emphasis on individual accountability in both reporting and remediating identified misconduct ensures that investment in compliance programs will be amply rewarded.

On December 23, 2025, the US Department of the Treasury (Treasury) released additional guidance in the form of seven additional frequently asked questions (FAQs), clarifying certain aspects of the Outbound Investment Security Program (OISP). As a reminder, the OISP aims to restrict US persons from investing in “Covered Foreign Persons” (i.e., certain persons with a nexus to China, Hong Kong, or Macau that are engaged in specified activities in the artificial intelligence, quantum computing, or semiconductors sectors). Depending on the nature of the Covered Foreign Person’s activities in the relevant technology sectors, a US person is either prohibited from investing in such Covered Foreign Person or is required to report such investments to Treasury (Covered Transactions).

While the OISP applies to a variety of forms of investments in Covered Foreign Persons, including the acquisition of equity interests or contingent equity interests in a Covered Foreign Person and the conversion of such contingent equity interests into equity interests, the regulations contain exceptions for certain types of transactions. Five of Treasury’s most recent FAQs aim to clarify the scope of one such exception: the publicly traded securities exception. The remaining new FAQs address the Comprehensive Outbound Investment National Security Act of 2025 (COINS Act) that became law on December 18, 2025, which codifies and expands the scope of the OISP.

Guidance on the publicly traded securities exception

Revised guidance on standard minority shareholder protections

Under the publicly traded securities exception, any investment in publicly traded securities, with “security” defined under 15 USC § 78c(a), that trade on a securities exchange in any jurisdiction or over-the-counter is not considered a Covered Transaction, so long as the acquisition of such securities does not provide a US person with rights beyond “standard minority shareholder protections.” Significantly, prior to the new FAQs, Treasury took the position that the right to nominate a candidate for an issuer’s board of directors was not a standard minority shareholder protection.

During the 12 months since the OISP went into effect, stakeholders have requested that Treasury reconsider its position on nomination rights, and they have sought further guidance on the scope of the publicly traded securities exception, including whether the acquisition of securities in an initial public offering (IPO) are Covered Transactions. The new FAQs address these issues.

In FAQ X.5, Treasury reversed its prior stance and determined that the right to nominate directors would be considered a standard minority shareholder protection so long as the right is “generally available to similarly situated shareholders of that entity solely by virtue of their minority shareholding.” However, the right to appoint a director (as opposed to nominating or proposing a candidate for a shareholder vote) is not a minority shareholder protection. Thus, acquiring an appointment right would take an investment out of excepted status.

This is a notable change for US persons seeking to invest in publicly traded securities of Chinese incorporated companies, Hong Kong incorporated companies, or companies listed on the Taiwan Stock Exchange, as those jurisdictions generally provide the right to nominate directors to investors with very low thresholds of share ownership (i.e., 1% for China, 2.5% for Hong Kong, and 1% for Taiwan-listed companies). As a result, US persons are not prohibited from acquiring the publicly traded securities of Covered Foreign Persons solely because doing so will grant such investors the right to nominate directors for a shareholder vote. However, the publicly traded securities exception will not apply if the nomination right is not generally available to similarly situated shareholders.

Acquiring shares in an IPO pursuant to a subscription agreement entered into prior to the IPO

Treasury was asked to clarify whether a US person engages in a Covered Transaction by acquiring publicly traded securities in an IPO pursuant to a subscription agreement entered into before the listing date. During the notice and comment period for the OISP regulations, Treasury declined to modify the language of the regulations in response to a similar question, but Treasury has now published FAQ X.4 stating that such a transaction does fall under the publicly traded securities exception so long as “at the time of such acquisition the equity interest is publicly traded,” regardless of when the agreement was entered into. While the FAQ does not explicitly say so, it appears to suggest that US persons may participate in an IPO as a cornerstone investor or through a subscription agreement, so long as the securities are not acquired before the securities are publicly listed.

Additional clarifications of the publicly traded securities exception

• Follow-on offerings: Treasury clarifies in FAQ X.1 that acquiring securities in a follow-on offering from an issuer whose securities are already publicly traded is an excepted transaction if the securities acquired are of the same class as, and will be fungible with, the issuer’s securities that are already publicly traded.
• Contingent equity interest convertible into publicly traded securities: FAQ X.2 clarifies that the initial acquisition of a contingent equity interest “that is convertible into, or provides the right to acquire, only a publicly traded security” is excepted as an investment in such publicly traded security. However, Treasury warns that the conversion of such contingent equity interest into an equity interest must be assessed separately for whether it would be a Covered Transaction.
• Underwriting services to IPOs: FAQ X.3 confirms that providing underwriting services or other ancillary services to an IPO are not Covered Transactions so long as the financial institution does not acquire an equity interest in connection with such services. As explained in FAQ X.1, however, a US financial institution’s acquisition of securities in connection with providing underwriting services for a follow-on offering would be excepted under the publicly traded securities exception if the securities are fungible with the issuer’s already publicly traded securities.

US persons should note, however, that the publicly traded securities exception still does not apply to any investment that provides a US person with rights beyond standard minority shareholder protections, including investments in follow-on offerings or contingent equity interests.

Impact of the COINS Act

On December 18, 2025, the COINS Act was signed into law as Title LXXXV of the National Defense Authorization Act for Fiscal Year 2026. Among its provisions is a requirement that the Secretary of the Treasury issue within 450 days of the COINS Act’s enactment regulations that restrict outbound investments from the US into countries of concern involving certain technologies. While the regulations envisioned by the statute are similar to the current OISP, there are certain key differences, including the addition of Cuba, Iran, North Korea, Russia, and Venezuela as countries of concern and the expansion of technology sectors targeted to include high-performance computing and hypersonic systems.

In response to the COINS Act, Treasury issued FAQs XI.1 and XI.2 confirming that the new law does not alter the provisions of the current OISP or the obligation to fully comply with its requirements. Until Treasury issues new regulations superseding the existing OISP regulations, US persons should continue their current practices to comply with the OISP.

Compliance takeaways

For the time being, Treasury’s new FAQs addressing the publicly traded securities exception are generally favorable to investors, with guidance now confirming that certain transactions are not covered by the OISP. As a result, US persons should familiarize themselves with the FAQs and evaluate their investment strategies and OISP compliance programs accordingly.

Although the details of the regulations issued pursuant to the COINS Act will likely remain unclear for the foreseeable future, US persons should remain cognizant of the fact that their obligations under such regulations will likely increase, with the COINS Act expanding the countries and technology sectors it applies to, among other changes. While any regulations Treasury issues pursuant to the COINS Act will presumably alter the OISP, pursuant to FAQs XI.1 and XI.2, US persons should continue to comply with the current OISP regime, regardless of the passage of the COINS Act.

If you have any questions concerning this client alert, please contact your McDermott Will & Schulte lawyer or one of the authors.

On January 7, 2026, the White House issued a sweeping new executive order (EO) titled “Prioritizing the Warfighter In Defense Contracting.” It declares, “Effective immediately, [underperforming defense contractors] are not permitted in any way, shape, or form to pay dividends or buy back stock, until such time as they are able to produce a superior product, on time and on budget.” The EO and accompanying White House Fact Sheet seek to implement a government-wide policy to accelerate defense procurement and revitalize the defense industrial base, with specific mechanisms to identify and remediate contractor “underperformance.”

The EO needs to be understood in the context of the US Department of War’s^[1] November 2025 Acquisition Transformation Strategy, which emphasizes three overarching priorities:

• Field technology and modernize systems at a rate that outpaces the nation’s adversaries;
• Increase production capacity and deliver wartime surge capacity for key capabilities, systems, weapons, and munitions to the US warfighter and priority allies and partners; and
• Put the entire acquisition system and the industrial base on a wartime footing with the urgency and mandate to accept more risk, transition from a culture of compliance to one of speed and execution, and rapidly tackle the strategic challenges facing the nation.

Shortly before and after the EO’s release, the president posted that defense contractors issuing “massive Dividends … and Stock Buybacks” were undermining plant and equipment investments, adding that “no Executive should be allowed to make in excess of $5 Million Dollars” until companies build new and modern production plants.

Key takeaways

1) Restriction on buybacks and dividends

• The EO targets “underperforming” contractors with a prohibition on dividends and stock buybacks. It states that “Many large contractors — while underperforming on existing contracts — pursue newer, more lucrative contracts, stock buy-backs, and excessive dividends to shareholders at the cost of production capacity, innovation, and on-time delivery.”
• The EO then mandates, in the next sentence, the following: “Effective immediately, they are not permitted in any way, shape, or form to pay dividends or buy back stock, until such time as they are able to produce a superior product, on time and on budget.” “They” appears to be a reference to the “large contractors” that are “underperforming on existing contracts;” however, as discussed below, it is unclear whether the prohibition is limited to contractors above any size threshold.
• The EO grants the Secretary of War (the Secretary) 60 days from the date of the EO to “take steps to ensure that any future contract … contains a provision prohibiting both any stock buy‑back and corporate distributions … [and] stipulate that executive incentive compensation … will not be tied to short‑term financial metrics, such as free cash flow or earnings per share driven by stock buy‑backs, and instead will be linked to on‑time delivery [and] increased production … ”
• The EO states that such measure will hold defense contractors to the “highest standards intended to ensure the advancement of core national interests, including with respect to the timeliness and quality of the defense items that they deliver.”
• According to the White House Fact Sheet, the Secretary is directed to include clauses in future contracts that “prohibit stock buybacks and corporate distributions during periods of underperformance, non-compliance, insufficient prioritization or investment, or insufficient production speed.”

2) Applicability to contractors

• The White House Fact Sheet and the EO refer to “defense contractors” and “major defense contractors,” and Section 1 contains a reference to “large contractors,” as discussed above. It is not clear, however, whether the EO only applies to contractors above a particular size threshold, contractors on “major defense programs” under 10 U.S.C. § 4201, or some other limitation. The term “major contractor” has been used in different contexts – with different dollar thresholds – in the FAR and proposed FAR rules over the years, but it is unclear whether the EO will be limited in such a manner.
• Neither the EO nor the Fact Sheet make distinctions based on organizational form, ownership or governance structure,  or public or private status.
• According to the EO, buybacks and dividends are “not permitted in any way, shape, or form” for underperforming contractors, indicating that the restriction applies regardless of whether buybacks and dividends might otherwise be permitted under existing corporate policies or prior board authorizations.
• The EO does not distinguish between prime contractors and subcontractors, nor does it exempt subsidiaries or joint ventures.
• Unless additional guidance is provided, contractors should operate under the presumption that privately held companies, subsidiaries, joint ventures, and other non-public entities performing defense work are subject to the same restrictions as publicly traded firms.
• The Fact Sheet directs the Secretary of War to include clauses in future contracts prohibiting buybacks and other forms of corporate distributions “during any period of underperformance, non-compliance, insufficient investment, or inadequate production speed,” and subcontractors should prepare in the event that these clauses are flowed down in subcontracts.

3) Applicability to private and publicly traded companies

• The EO affirms its reach “across our economy,” noting that “Every firm … has a right to profit,” but underscoring that “the American defense industrial base also has the responsibility to ensure that America’s warfighters have the best possible equipment and weapons.”
• While stock buybacks are typically associated with public companies, the EO’s language extends to any form of “corporate distributions.” The term “corporate distributions” remains undefined but appears to extend beyond traditional dividends to include owner payments and other forms of payments to shareholders. The implications for limited liability company member draws, partnership distributions, and employee stock ownership plan‑related payments are unclear and may turn on future guidance from the Department of War.

4) Executive incentive compensation will be tied to delivery and production

• The EO mandates that executive incentive compensation for defense contractors must not be “tied to short-term financial metrics, such as free cash flow or earnings per share driven by stock buy-backs,” but instead must be “linked to on-time delivery, increased production, and all necessary facilitation of investments and operating improvements required to rapidly expand our United States stockpiles and capabilities.”
• In addition to limitations on performance-based incentives, the EO contemplates capping executive base salaries at their “current levels, with increases allowed for inflation.”
• The president’s Truth Social posts following release of the EO state that no executive should receive total compensation exceeding $5 million until their company has constructed new and modern production plants. As noted above, the EO itself does not specify a specific dollar ceiling and instead freezes compensation at “current levels,” leaving some ambiguity regarding enforcement and the interplay between the EO’s contractual requirements and the President’s public statements.
• Contractors should anticipate that future government contracts may include explicit provisions linking executive compensation to delivery and production outcomes and may also incorporate salary caps or other limits consistent with the administration’s stated priorities. Companies are advised to review current compensation structures and prepare to adjust incentive plans to align with these new requirements.

5) SEC safe harbor protections

• The EO directs the Chairman of the Securities and Exchange Commission (SEC) to consider whether to adopt amended regulations governing stock buybacks under 10b-18 that would prohibit use of the safe-harbor protections for underperforming defense contractors.
• If the SEC amends Rule 10b-18 as contemplated by the EO, underperforming defense contractors could lose the “safe harbor” that currently protects them from certain market manipulation liability when conducting stock buybacks. This would expose such contractors to increased risk of SEC enforcement actions or private litigation related to the timing, volume, or manner of their repurchases.
• These regulations could affect how defense contractors assess and implement stock repurchase plans in light of potential liability concerns and considerations. Contractors should consider updating compliance policies and enhancing documentation of the rationale for any repurchases to mitigate potential liability.

6) Enforcement of underperformance

• The EO authorizes the Secretary of War to identify defense contractors who are “underperforming.” The White House Fact Sheet characterizes “underperforming” contractors as those that “fail to invest their own capital in production capacity, insufficiently prioritize U.S. government contracts, or maintain inadequate production speed while spending money that could be spent on those critical needs on stock buybacks or corporate distributions.”
• The EO directs the Secretary to take into account the following “[w]hen considering whether to initiate any available enforcement action:”
  • “The financial condition of the defense contractor,”
  • “The economic viability of relevant programs,” and
  • “The potential mutual benefits offered by robust and sustained growth opportunities from the United States Government coupled with capital investments by the contractor.”
• When a contractor is identified as underperforming, the EO directs the Secretary to issue a written notice “describing the nature of the underperformance or insufficient prioritization, investment, or production speed.” The contractor must then submit a board-approved remediation plan within 15 days of receiving the notice, detailing corrective actions and a timeline for improvement.
• If the Secretary determines that the remediation plan is inadequate, or if the contractor and the Secretary cannot resolve the dispute within the 15-day negotiation period, the EO empowers the Secretary to pursue remedies “to the maximum extent permitted by law, including through use of any voluntary agreement of the contractor, available enforcement actions under the Defense Production Act (50 U.S.C. 4501 et seq.), and any available contract enforcement mechanisms within the Federal Acquisition Regulations and Defense Federal Acquisition Regulations Supplement.”
• In addition, the EO empowers the Secretary, “in consultation with the Secretaries of State and Commerce,” to consider “whether it is appropriate to cease ongoing advocacy efforts or deny new advocacy cases for underperforming contractors competing for international Foreign Military or Direct Commercial Sales.”
• The EO specifies that these restrictions will remain in place until the contractor demonstrates “superior product, on time and on budget,” though it does not define these performance standards in detail. Contractors should anticipate further guidance on the metrics and evidence required to lift these restrictions.

What defense contractors should do now

1) Map potential exposure

• Inventory buybacks and dividends over the past 24 months.
• Review commitments under current board authorizations and planned actions in 2026 –  2027.
• Assess any ongoing or planned buyback programs and be prepared to suspend such activities in compliance with the new mandate.
• Review existing government contracts and evaluate those where EO‑driven clauses are likely.
• Review past and current performance metrics, with a focus on production levels and on-time delivery rates.

2) Evaluate existing guidance, disclosures and board authorizations

• Boards and management should assess whether the prohibition on stock repurchases affects previously issued earnings per share (EPS) guidance. Many companies’ EPS projections assume ongoing buybacks, which reduce the number of shares outstanding and can impact reported EPS. Management, the disclosure committee, and the board should evaluate whether current guidance remains accurate or if updates are needed.
• Companies should review their stated dividend policies, as disclosed in periodic reports, to determine if changes are warranted in light of the EO’s restrictions.
• Boards should consider whether it is prudent or necessary to formally cancel any existing authorizations for stock repurchase programs, given the new prohibitions under the EO and related commentary relating to the availability of Rule 10b-18 safe harbor.

3) Prepare a performance narrative

• Prepare to demonstrate performance using program‑specific metrics.
• Distinguish government‑driven changes or delays from contractor‑controlled factors and document approved baseline changes.
• If possible, prepare a narrative that shows month‑over‑month improvements to performance metrics.
• If distributions occurred, explain the board’s capital allocation rationale and any simultaneous investments that increase capacity and performance.

Why this matters: The EO creates a rebuttable posture; the Secretary may presume that distributions during performance shortfalls are misaligned. Contractors must be ready to prove that performance is being met or is improving and that capital allocation supports warfighter needs.