Reflecting on that dire period, Paulson wrote, "in retrospect, I see the industry's setup was too good to be true. The idea that you could earn more than what the Federal government paid for overnight liquidity and still have overnight liquidity made no sense."

Among the possible changes are removing that special treatment and requiring money market funds to report the change in their value each day as other mutual funds do, or requiring money market funds to hold more capital.

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It is unclear whether the fund industry will succeed in putting off reforms. One former SEC official, now representing fund companies in their efforts to block reforms, believes they can at least be stalled until the Presidential election. At that point, a Republican victory might succeed in pushing the issue off the agenda.

Even if President Obama holds on to the White House, SEC Chairman Mary Schapiro is widely expected to resign, and a new Chairman might have a new set of priorities, the ex-SEC official reasons. He further notes that three of the five SEC commissioners have expressed reservations about new rules for money market funds.

That doesn't surprise Chicago-Kent Professor Birdthistle.

"It's not hard to conclude that the SEC would rather oversee a $3 trillion industry than to oversee a $0 industry. No regulator wants to succeed so much that they put themselves out of business."

The SEC may be powerless to stand in the way of changes, however, since the big push for reforms comes from the Federal Reserve, according to Ed Mills, government policy analyst at FBR Capital Markets. Nonetheless, Mills isn't sure new rules will be as destructive to the industry as some fear.

"There are many ways of threading the needle here. There is a way of making sure these reforms are implemented that protect money market funds but do not throw out the baby with the bathwater," he says.

Among changes suggested by Mills include increasing capital requirements only against some of the riskier holdings of money market funds.

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Despite several meetings between SEC officials and industry executives and the continued submission of comment letters, the industry has hardened its position this year, according to SEC Commissioner Elisse Walter.

"The two-way conversation broke down, and the industry generally stopped talking and started 'just saying no," Walter wrote via email.

-- Written by Dan Freed in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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