Sen. Chuck Grassley, an Iowa Republican, and Sen. Carl Levin, a Michigan Democrat, took a step toward future financial sanity by introducing a bill that would increase regulation of hedge funds, which are essentially mutual funds for wealthy people.

Despite holding hundreds of billions in investments, often turbocharged with borrowed money, hedge funds typically have not had to register with the Securities and Exchange Commission. The proposed Hedge Fund Transparency Act of 2009 would change that, although it would still allow hedgies to avoid the full legal requirements covering mutual funds.

“Hedge funds have gotten so big and are so entrenched in U.S. financial markets, that their actions can now significantly impact market prices, damage other market participants, and can even endanger the U.S. financial system,” said Levin as he introduced the bill Thursday. “You’ve got to ask how anyone in their right mind could believe that the current regulatory exemption for hedge funds makes sense.”

Hedge funds did not trigger the financial meltdown. That was accomplished mainly by investment banking companies and mortgage originators. But the larger lesson is that secrecy and regulation-lite are dangerous for any financial industry.

Grassley’s and Levin’s bill is one of numerous needed reforms.