The SEC is to be challenged in court by a prominent shareholder activist about the financial regulators attempt to supervise hedge funds.

Phillip Goldstein's lawyers will ask a federal appeals court to declare invalid the hedge fund registration rule by the SEC.

The U.S. Chamber of Commerce is also seeking to strike down the rule.

Mr Goldstein is head of the New York based hedge of hedge fund Opportunity Partners.

The legal argument centres on Mr Goldsteins assertions, "because the SEC does not have have the statutory authority to extend its regulatory power to a hedge fund" under the 1940 investment advisers law.

Not only is the law invalid according to Mr Goldstein, but that the SEC had "vastly underestimated" the compliance costs with registration.

Hedge fund managers with more than $25m under control are required to register with the SEC by February 1 2006.

Investment advisers with less than 15 investors are not required to register with the SEC under the 1940 Act provided they do not market themselves to the public.

In 1985 the SEC allowed such firms to count each partnership into which investors put money as a single investor.

The new rule forces the advisers to count each investor individually, taking them over the 15 limit.

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