I guess I would understand it to mean "It's okay to curse or talk about your sex life with me."
If I wanted to say something that meant this, I'd probably say "You know, it's okay to loosen up some with me."
To me, it might mean, "You don't have to pretend to be a member of the NRA, a committed Christian, and opposed tooth and nail to Obama's healthcare policies." Naturally, the political environment would change the actual details of the sentence. I agree with Dave that 'reserved' is a much better word, or 'reticent'.
Or you could frame it in a positive sense: "You can be more open with me" or something to that effect.
I agree with the final part of Raymott's post. I would say "You do know that you can completely relax with me, don't you?" or something. It would be interesting to know what behaviour your friend does/doesn't exhibit in order for you to state that they are "conservative" with you.