A disposition refers to the reduction or elimination of a security position, resulting in a decrease in a reporting person’s beneficial ownership. In U.S. securities regulation, the term is used descriptively to cover transactions in which securities are sold, transferred, surrendered, or otherwise disposed of, regardless of the method or motivation for the transaction.
Within insider reporting under Section 16 of the Securities Exchange Act of 1934, a disposition is a reportable event when it results in a change in beneficial ownership that is required to be disclosed under the SEC’s rules.
Regulatory Context
Section 16 reporting focuses on changes in beneficial ownership, not on the economic character of a transaction. A disposition may occur through an open market sale, a private transaction, the surrender of securities to an issuer, or the disposition of securities resulting from the settlement or exercise of a derivative security, depending on the structure of the derivative.
For reporting purposes, dispositions of non-derivative equity securities are reported under Exchange Act Rule 16a-3. Transactions involving derivative securities are subject to the reporting framework set out in Rules 16a-1 and 16a-4, which determine how dispositions of derivative positions and resulting changes in ownership of underlying equity securities are disclosed.
Reporting Treatment
On Section 16 insider filings, sales of securities are commonly reported using transaction code “S”, which the SEC defines as an open market or private sale. Other types of dispositions are reported using different transaction codes depending on the mechanism of the transaction, such as dispositions to the issuer, tax-withholding transactions, gifts, or other non-sale transfers.
When a disposition involves a derivative security, the reporting treatment depends on whether the derivative itself is disposed of or whether the disposition arises from the settlement or conversion of the derivative. The Form 4 structure reflects these distinctions by separating derivative and non-derivative transactions into different tables.
Relationship to Other Transactions
A disposition is the counterpart to an acquisition, which increases beneficial ownership. It is distinct from an option exercise, which converts a derivative right into ownership of the underlying equity security, even though a disposition may occur in connection with certain derivative-related transactions.
The classification of a transaction as a disposition depends on how ownership changes, not on the reason for the transaction or its market context. As with other Section 16 concepts, the reporting framework describes structural changes in ownership without evaluating their significance.
Sources
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17 CFR § 240.16a-3 — Reporting requirements for changes in beneficial ownership
https://www.law.cornell.edu/cfr/text/17/240.16a-3 -
17 CFR § 240.16a-4 — Treatment of derivative securities
https://www.law.cornell.edu/cfr/text/17/240.16a-4 -
SEC Form 4 Data Instructions — Transaction codes and disclosure of dispositions
https://www.sec.gov/files/form4data.pdf -
SEC — Ownership Transaction Codes
https://www.sec.gov/edgar/searchedgar/ownershipformcodes.html