Bank of America Corp. and FleetBoston Financial Corp. agreed to pay a record $675 million to settle allegations that executives allowed mutual fund trading by favored clients that diluted the gains of other investors. It’s a big deal for New York Attorney General Eliot Spitzer.

Bank of America, which is buying FleetBoston, will pay $375 million, while FleetBoston will pay $140 million. The penalty by the Securities and Exchange Commission and New York Attorney General Eliot Spitzer is the largest since Spitzer began to probe the $7.5 trillion fund industry last year. In a separate agreement with Spitzer’s office, Bank of America will cut fees by $160 million over five years.

“Getting this out of the way will help them focus on merging the two companies together,” said Robert Maneri, who helps manage about $50 billion, including Bank of America and FleetBoston shares, at Victory Capital Management in Cleveland.

Eight directors of Nations Funds, Bank of America’s mutual fund unit, will resign or leave the board in the next year, Spitzer said. Bank of America neither admitted nor denied the regulators’ allegations. Bank of America, which last week won Federal Reserve approval of its $48 billion FleetBoston purchase, also agreed to exit the securities clearing business by the end of the year.

Stephen Cutler, the SEC’s enforcement chief, said in a statement that the agency’s investigation would continue “in an effort to hold all responsible parties accountable.” The settlement still requires approval from the agency’s commissioners.

Bank of America Chief Executive Kenneth Lewis, 56, fired at least five executives and set aside $100 million for fines since Spitzer accused the Charlotte, North Carolina-based company of trading abuses. Spitzer and the SEC have filed civil complaints against eight firms in the biggest fund-trading probe ever.

In December, Alliance Capital Management Holding LP agreed to pay a $250 million penalty. Sun Life Financial Inc.’s MFS Investment Management said in February it would to pay a $225 million fine. The firms also agreed to cut fees by hundreds of millions of dollars more in settlements with Spitzer.

Spitzer said in a Sept. 3 complaint that Bank of America helped Canary Capital Partners LLC, a New Jersey hedge fund, earn “tens of millions” from improper trading in exchange for investments that generated millions in revenue for the bank.

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