Dance partners Bank of America and FleetBoston Financial, whose merger is days away from a shareholder vote, yesterday to a $675 settlement, which will also see eight members of BoA’s Nations Funds board step down and the firm exit the securities clearing business. It is the largest settlement to date in the ongoing fund investigation.

In an agreement with the Securities and Exchange Commission, Bank of America agreed to pay a total of $375 million ¾ $250 million of that in disgorgement and $125 million in penalties. Additionally, FleetBoston agreed to a $140 million settlement with the SEC for impropriety at two of its Columbia units.

In addition to the $515 million the firms agreed to in their deal with the SEC, New York Attorney General Eliot Spitzer said that the pair entered into a deal with his office to reduce the fees they charge investors by $160 million over the course of five years, bringing the total to $675 million.

"This agreement marks a new phase in the effort to clean up the mutual fund industry," Spitzer said in a statement, noting the sum of all the settlements in the mutual fund scandal total $1.65 billion so far, eclipsing the $1.4 billion Wall Street analyst agreement. "After focusing on the harmful effects of market timing and the problems of excessive fees, we are now taking steps to ensure that mutual fund boards of directors will be more accountable for their actions."

As such, Spitzer said that as part of his office’s agreement with BoA, eight Nations Funds directors have agreed to resign or leave the board in the next year for their role in approving a measure that allowed timing by a hedge fund. "The departure of these board members should sound an alarm for all those who serve in similar capacities," Spitzer said.

The SEC also said that BoA agreed to exit the securities clearing business by the end of the year.

BoA was originally named in Spitzer’s complaint against hedge fund Canary Capital on Sept 3, 2003. "This settlement is a new benchmark in mutual fund market timing and late trading," said Mark Schonfeld, associate director of the SEC’s northeast regional office, in a statement. "Bank of America not only permitted timing in its own funds, it provided the instruments for timing and late trading of numerous other funds through its broker/dealer. This settlement will ensure compensation for all victims of the harm that resulted and prevent this misconduct from happening again."

Last month, regulators announced charges against two of FleetBoston’s Columbia units for entering into multiple market timing arrangements with select investors, contrary to prospectus language that indicated the firm did not allow such activity. The charges detailed some of the most egregious abuses to the detriment of buy and hold investors and the SEC sought to bar Columbia from managing its own mutual funds.

Regulators still have charges pending against BoA broker Theodore Sihpol, who is facing up to a quarter-century behind bars for his role in the schemes. Columbia had place eight executives and portfolio managers on leave, including James Tambone and Louis Tasiopoulos, co-presidents of Columbia Funds Distributor. Christopher Legallet, manager of the Columbia Newport Tiger Fund and Joseph Palombo, Columbia Management Group's COO, are also among those suspended.

Additionally, BoA said it will take a first-quarter charge of 16 cents a share due to the settlement. The SEC noted the deal is an agreement in principle, and is not yet finalized.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.