(FORTUNE Magazine) -- A federal court recently tossed out an SEC rule requiring hedge funds to register with the agency. Now Congress is considering more expansive rules. Here's why hedge-fund regulations are being scrutinized.

1 How are hedge funds regulated now? They are subject to basic securities rules but do not have any restrictions on types of investments (like short-selling) or fees paid to managers, unlike mutual funds or pensions. They avoid such laws by limiting themselves to a small number of very wealthy clients and not publicly soliciting investors.

2 Has that changed in recent years? Since 2003, hedge funds have had to register with the SEC and provide data about assets and returns. But the appeals court decided that the SEC unfairly interpreted its laws to include hedge funds because it counted each pension-fund investor as many clients. SEC chairman Christopher Cox will decide by Aug. 7 whether to appeal the ruling.

3 Why is the government suddenly so interested? Hedge funds have assets worth about $2.3 trillion, up from just $870 billion in 2003. Regulators feel they don't know where all that money is invested and thus can't predict how hedge funds will affect the economy. They are also alarmed by claims that some hedge funds are paying research firms to put out negative reports to bolster their short positions.

4 Will the rules change? Maybe. Dems have a bill in the House to modify the SEC's rules to force funds to register, and several states are considering new regulations of their own.