NEW YORK (CNNMoney.com) -- The Securities and Exchange Commission has only until Aug. 7 to decide whether to appeal a ruling against its hedge fund regulation measure - but how the SEC will proceed is far from clear.

Last week the U.S. Court of Appeals for the D.C. circuit threw out the SEC's hedge fund registration rule, which took effect in February after years of intense debate. The rule required hedge funds to register with the SEC as investment advisers and submit to occasional inspections of their books and records.

The SEC now has a number of options to consider, according to Mitch Nichter, a partner in law firm Paul Hastings.

It can petition for a re-hearing in D.C. or for a "stay" pending an appeal to the U.S. Supreme Court. The SEC's original rule would stay in effect for the time being in either case.

The SEC would have until Sept. 21 to file an appeal to the Supreme Court, and that option would buy the most time, Nichter said.

Another option: skip petitioning altogether and wait for the legislature to put a solution in place. After the SEC's rule was overturned, Rep. Barney Frank, D-Mass.. introduced a bill that would re-instate the rule.

Hedge funds are private investment partnerships limited to institutional investors and wealthy individuals. Hedge funds use a variety of strategies, from betting on or against stocks, currencies or commodities to more esoteric strategies involving derivatives. Estimates of the size of the hedge fund industry vary, but one widely used figure is $1.225 trillion, according to Hedge Fund Research in Chicago.

A spokesman for the SEC said the commission has not yet determined what course of action it will take. SEC chairman Christopher Cox told reporters last week that the SEC is considering an appeal to the Supreme Court, but added that he is weighing "potential reputational damage" if SEC loses.

"There's a possibility that if they appeal to Supreme Court and lose they'll have a really bad precedent on their hands," said Terrence O'Malley, a partner in law firm Fried Frank. "But (Cox) is saying they will keep that on the table ... so that suggests there is some serious debate internally."

Other observers think it's more likely the SEC will pursue other channels. "I wouldn't be surprised if they didn't appeal," said Perrie Weiner, co-chair of the Securities Practice at law firm DLA Piper Rudnick and head of the firm's hedge fund group. "At this point, the best road for the SEC is to try and narrow the field in terms of what they are trying to achieve."

Jedd Wider, a partner in law firm Morgan Lewis, also believes it is highly unlikely that the SEC will appeal to the Supreme Court, but that doesn't mean the agency will abandon its plans to regulate hedge funds. "A tremendous amount of time and energy and focus was spent by the SEC over the past several years on this issue," said Wider.

In the mean time, Cox testified last week before the Senate banking committee that he is urging the SEC to implement emergency steps that would re-instate some of the provisions of the rule.

Some of the emergency steps Cox wants to enact would be beneficial to hedge funds, Cox said. He said he feared that when the court vacated the SEC's rule, it may have also thrown out "safe harbor" provisions that were designed to clarify certain rules under the Investment Advisers Act of 1940.

"When the SEC adopted the rules requiring hedge fund managers to register, they adopted some other requirements simultaneously and gave some regulatory guidance," said O'Malley. "Maybe it's not what the court intended, but a literal meaning of what they wrote means the other stuff is thrown out as well."

Cox's emergency recommendations include a grandfather clause that would permit newly registered hedge fund advisors to charge a performance fee to investors - a key feature of hedge funds, and one that Cox fears would be voided for newly registered managers if the court's ruling is interpreted and applied literally.

Cox testified that this provision of the rule was designed to prevent a newly registered hedge fund from having to renegotiate the terms of its existing contracts with investors and from having to throw out pre-existing investors who did not meet the new minimum wealth threshold that the hedge fund adviser rule established.

Cox also is pushing the SEC to enact other provisions that would benefit newly registered managers, including one that would restore to newly registered hedge fund advisers their qualified exemption from the record keeping requirement for performance data prior to their registration.

According to Cox, voiding the hedge fund adviser rule means that all hedge fund advisers who registered with the SEC but did not create records of their performance for the periods prior to their registration would lose the ability to use their performance track record, "rather perversely" discouraging these managers from staying registered, he said.

Regardless of what steps the SEC takes, the issue is far from over, according to hedge fund attorneys.

"The SEC intends to regulate this industry one way or another," said Lawrence Vincent, senior associate in the hedge fund practice at Bryan Cave LLP. "It's a trillion-dollar industry. The reasons they stated for wanting to regulate it have not abated, so I can't see why they would just give up on it."

Weiner remains hopeful that Cox will take a measured approach to hedge fund regulation, pointing out that in his testimony the Chairman expressed a desire to prevent regulation from becoming so onerous that it would discourage hedge funds from operating in the United States.

"He recognizes that hedge funds are vital to the health of our capital markets ...and he realizes less is more" where regulation is concerned, Weiner said.