The registration and regulation of hedge funds, private-equity funds and other “alternative” investment advisers was one of the cornerstones of the financial reform bill. It was supposed to shine a light into the otherwise murky world of institutional trading – a world that’s often blamed for everything from the financial crisis to the Bernard Madoff scam. But the SEC can’t even answer the simple question of when hedge funds must register, which hardly inspires confidence in the oversight of what is now a multi-trillion dollar industry.

“I’ve never seen anything like this, and I’ve been practicing for almost 30 years as a regulatory lawyer in the investment management area,” says Laurin Blumenthal Kleiman, a partner at Sidley Austin, a law firm that advises financial clients on Dodd-Frank reform. She says she has sympathy for SEC staff because even the most gradual rules usually take months to deliberate and refine. Now that a whole industry is moving from an unregulated status to the SEC’s umbrella, the change is being pushed through at “breakneck speed,” she says.

Larry Eiben, chief operating officer of TFS Capital, a hedge-fund firm that’s already registered with the SEC because it also runs mutual funds, is also sympathetic. “I think they’re overloaded,” Eiben says. “The registration of hedge funds is a massive, massive undertaking, with every hedge fund doing something different, and many of them doing things the SEC has never seen before.”

The main area of confusion: the SEC’s November draft rule requiring hedge funds with over $150 million in assets under management to register with the agency, with a proposed deadline of July 21. The agency had a standard 45-day review period for investment-adviser registration papers. So the proposed deadline for registration filings was effectively Monday, June 6. Two days after that, the SEC broke its silence and scheduled a vote on the final rule for June 22.

In the meantime, hedge funds are left with a dilemma: Do they rush to comply with a deadline that’s still only a proposal? Or do they wait for June 22 to see if the SEC will officially extend the deadline, and in so doing risk breaking a regulation before they have even become regulated entities?

Registration with the SEC entails more than filing the paperwork. As outlined in the draft rule, many firms will have to change bookkeeping, trading data, asset-valuation and asset-custody protocols to meet uniform SEC standards. As a practical matter, most funds will have to hire compliance officers and produce compliance literature.

The challenges of getting all these ducks in a row prompted the SEC’s talk of a deadline extension in the first place, at least in part. Benette Zivley, the commissioner of the Texas State Securities Board, says there was also a technical holdup with the Investment Adviser Registration Depositary, an online registry used by both the SEC and the states.

Judith Burns, an SEC spokeswoman, says an April 8 letter from senior SEC staffer Robert Plaze to David Massey, the head of the North American Securities Administrators Association, a confederation of state regulators, was made public to clear up the matter of the deadline.

The letter is clear, for a letter of its kind:

“We anticipate that the Commission will issue…final rules in advance of July 21,” wrote Plaze. “We expect that the Commission will consider extending the date by which these advisers must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012.”

But a letter to a state regulator is a long way from a binding directive for funds to follow, says Janaya Moscony, a former examiner at the SEC who now runs a compliance-services firm called SEC Compliance Consulting. “It’s not normal to write a letter to NASAA and think that the industry is going to rely on that from a legal perspective,” she says.

Reading the SEC’s smoke signals

Moscony’s hedge fund clients are left scratching their heads. “Some don’t want to rely on a letter from the SEC to a state regulator that’s not official,” she says. “Then I talked to the SEC, and they says there’s nothing we can do to make it more official.” Some hedge funds she advises want to follow the letter of the law and are scrambling to complete registration by July 21.

Kleiman recalled reading Plaze’s letter on her Blackberry, and thinking: “What does it mean? ‘The commission will consider the deadline’? Are they doing it or are they not, how do we gauge?” she says. She even wondered whether the threat of a government shutdown on April 8 had prompted the SEC to publicize the letter in haste, like some kind of final wish.

Reading the “smoke signals” from the SEC, Kleiman is advising fund clients to delay filing until the final rule appears while expediting their preparations for the regulatory regimes.

In another letter dated April 27, SEC Chairwoman Mary Schapiro reiterated Plaze’s point that the deadline was likely to be extended until the first quarter of 2012. There is still no official guidance has emerged from the SEC. Burns, the SEC spokeswoman, says to “stay tuned.”

State regulatory bodies had also expected to hear more from the SEC by now. As outlined in Plaze’s letter, the draft rule requires “mid-sized” hedge funds and alternative advisers, or those with assets under management of between $25 million and $100 million registered at the federal level to shift their paperwork to relevant state authorities.

For funds forced to shift from state to federal registration, Zivley recommended pursuing a dual registration with states that allow such a thing, to avoid falling between two stools during the process.

As for funds based overseas that invest in the U.S., much hangs on the final version of the rule, says Kleiman. Under the rule currently proposed, hedge funds domiciled offshore could invest billions of dollars in the U.S. but still avoid registration with the SEC as long as they don’t have more than a handful of U.S. investors.

“I think it’s safe to say that Dodd-Frank as a general matter and the rules and regulations that come out of it are going to provide some interesting interpretive issues for lawyers,” says Kleiman.