The mutual funds industry is worth $7 trillion

It is the biggest pay-out yet won by regulators monitoring US mutual funds, in which at least half of US households have savings.

Bank of America and FleetBoston agreed to pay fines and cut their fees, but admitted no wrongdoing.

The US market regulator and New York's attorney general unveiled the deal.

Campaign for small savers

The settlement is another victory for Eliot Spitzer, New York's attorney general, who launched a crusade in mid-2003 to weed out trading practices that can damage the interests of small investors.

The US Securities and Exchange Commission (SEC) opened investigations into investment firms targeted by Mr Spitzer, who took his own high profile campaign to Congress.

Other financial institutions that have settled with the SEC include Alliance Capital for $250m; Morgan Stanley for $50m; and Putnam Investments, the fifth biggest US mutual fund.

Bank of America and FleetBoston are planning a $47bn merger. The settlement clears away an embarrassment ahead of shareholder meetings on Wednesday to clinch their union.

They agreed to pay a combined total of $515m in fines, and to cut fees by $160m over five years.

Alarm bells

Eight directors of Bank of America's Nations Funds are to step down from its board within a year for ignoring improper trading by a client, Canary Capital Partners.

Mr Spitzer said the eight had "clearly failed to protect the interest of investors", adding that "the departure of these board members should sound an alarm for all those who serve in similar capacities".

At least 30 people had already lost their jobs on Wall Street as part of the crackdown in the mutual fund industry before these departures.

Mr Spitzer, the SEC and a host of state-level regulators are trying to track down and weed out market-timing, the practice of short-term trading in mutual fund shares by industry insiders.

Although not illegal, market-timing violates the sector's codes of practice and the pledges given to savers by most mutual funds.