NEW YORK (HedgeWorld.com)–As many as several thousand U.S.-based hedge fund managers have not registered with the Securities and Exchange Commission.

Most of them are probably too small to be subject to the registration requirement. Among large managers, a number already had a lock-up of two years or longer, or possessed enough bargaining power with their clients to institute such lock-ups, thereby becoming exempt from registration.

Others have stopped taking money and are in a wait-and-see mode. Views differ as to how long that can last. One issue: Even if the manager is exempt, not registering means being barred from certain opportunities like managing pension money or a registered fund.

Anybody who advises funds that are registered under the 1940 Act or who directly manages money from pensions that are subject to ERISA must be a registered investment adviser. So there can be good business reasons to register, and the SEC rule is only one aspect, said Derek Steingarten of the law firm Goodwin Procter in Boston.

While there are reasons for not registering, such as the expense of hiring a compliance officer and other regulatory burdens, he recommends that managers who aren’t required to register weigh the costs against the business benefits of doing so. Mr. Steingarten noted that registration does not in itself require the disclosure of portfolio positions or investment strategies.

On the other side, one argument against registration goes as follows. Philip Goldstein of Opportunity Partners LP might win his lawsuit challenging the SEC interpretation that forms the basis of the registration mandate. If that happens, the SEC will have to decide whether to appeal the court decision.

Hedge fund registration was the previous SEC chairman’s (William Donaldson’s) baby. The current chair, Christopher Cox, may not want to actively overturn the controversial decision, but if a court overturns it, he may not contest too strenuously.

Mr. Cox must be worried about spending more of the agency’s resources investigating hedge funds at a time when the resource issue is becoming particularly acute for the commission.

Given the immense federal deficit, the regulator is not getting much of a budget increase. This month Reuters reported that the SEC is shrinking its staff through attrition and will end the fiscal year with fewer people than before. Its ability to shift people to the hedge fund area is limited; it can’t neglect its responsibility to oversee mutual funds, especially after several mutual fund trading scandals.

For his part, Mr. Steingarten said he believes that the SEC will continue to work on registering hedge fund managers and that after devoting considerable resources to the registration effort, the agency will continue to do so in order to ensure compliance.

But there isn’t much pressure on successful managers with long lock-ups. Roger Fenningdorf, partner at the institutional consultant Rocaton Investment Advisors, said registration is probably beneficial for the industry in promoting more documentation and transparency, but he doesn’t advise his clients to require it of their managers.

Mr. Fenningdorf said the firms that don’t have to register are the ones with significant business already in place and a strong record. “We want to get our clients the best possible managers, so we don’t see registration as the sole criterion,” he said.

CKurdas@HedgeWorld.com