Staff of the U.S. Securities and Exchange Commission have metwith the Internal Revenue Service to discuss tax implications ifmoney-market mutual funds were to adopt a floating share price, twopeople familiar with the talks said.

Discussions have centered on the tax treatment of small gainsand losses for investors in funds, said the people, who asked notto be named because the talks weren't public. IRS officials havetold the securities regulator that they don't have much flexibilityto interpret current tax law, one of the people said.

The discussions suggest SEC staffers are developing a moredetailed proposal to force money funds to adopt a floating shareprice, a move the industry has said would destroy their appeal. Onesuch proposal prepared last year under the direction of former SECChairman Mary Schapiro was rejected by three of her four fellowcommissioners in August, even before they were presented with aformal draft.

“The tax treatment of a floating fund is one of the mainreservations expressed in comment letters” filed recently withregulators by fund companies, Joan Swirsky, an attorney atPhiladelphia law firm Stradley, Ronon, Stevens & Young LLP, whospecializes in money-fund oversight, said in an interview. “Thiswill be a fully baked proposal by the time it comes out.”

John Nester, a spokesman for the SEC, didn't immediately respondto a request for comment.

Regulators have worked to impose tighter restrictions on moneyfunds since the September 2008 collapse of the $62.5 billionReserve Primary Fund. Its failure, caused by losses on debt issuedby Lehman Brothers Holdings Inc., triggered a wider run on moneyfunds that helped freeze global credit markets.

Schapiro's plan aimed to make funds less susceptible to runs andbetter able to absorb losses. It would have offered funds a choiceof replacing their fixed $1 share price with a floating price thatreflects the market value of holdings, or creating capital reservesand restricting redemptions.

Following the rejection, Schapiro appealed for help from theFinancial Stability Oversight Council, a super-panel of regulatorsformed by the Dodd-Frank Act and headed by the Treasury secretary.The council, whose job it is to identify systemic financialthreats, acted in November, pressuring the SEC to revisit the issueand recommending several reform options, including a floating sharevalue and capital buffers.

Republican Commissioner Daniel M. Gallagher said in a Jan. 16speech that SEC staff were preparing a rule-making proposal heexpected to see before the end of March.

“Forcing money-market funds to float their net asset value haslong been on the SEC's menu of options for structural changes,”Mike McNamee, a spokesman for the Investment Company Institute, thefund industry's Washington-based lobby group, said in an e-mailedstatement. “We continue to believe that temporary 'gates' to haltredemptions from prime money-market funds during times of marketstress, with the option to impose fees for investors seekingfurther redemptions, would better address regulators' concernsabout redemption pressures.”

A floating share price may also create new accounting challengesfor investors, although they could be directly addressed by theSEC, one of the people said. The agency has the authority to setaccounting standards.

The commission staff is grappling with concerns that a moneyfund with a floating share value might not be considered a cashequivalent, the person said. That could make them less attractiveto institutional investors and businesses that need to hold acertain percentage of assets in cash. The SEC could propose toclarify the cash status of money funds as part of a new ruleproposal, the person said.

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