A former Greater Manchester Police officer has said he was threatened with the Official Secrets Act after finding the MP with two teenage boys in 1988.
His claim is being investigated as part of an investigation into old child sexual abuse reports.
The Independent Police Complaints Commission (IPCC) said it would now "manage this specific allegation".
Earlier this month an unnamed retired Greater Manchester Police (GMP) officer said he was told "keep your mouth shut" in the 1980s after he found the former Rochdale MP in the Stockport home of a known sex offender with two teenage boys.
He alleges he was threatened with the Official Secrets Act and ordered by a senior officer to say nothing about it.
The IPCC claimed its involvement would "ensure independent oversight" of the allegation, while ensuring GMP's wider criminal investigation, Operation Clifton, was not affected.
Operation Clifton, launched in July, is a probe into how previous reports of child sexual abuse were handled or allegedly covered up.
Northamptonshire Police is also probing claims police released Smith after child abuse images were found in the boot of his car on the M1 in the 1980s.
Five witnesses have come forward over allegations he was released from custody after he made a telephone call to a third party in London.
Twenty-three people have claimed they were abused by the Liberal MP, who died aged 82 in 2010.
Police said allegations against Smith related to teenage boys in Rochdale between 1960 to 1987.
GMP said as it was a continuing investigation, it would not be appropriate to comment.
The police watchdog has taken charge of an inquiry into the handling of an alleged incident involving Cyril Smith.