NEW YORK (CNN/Money) - Bank of America and FleetBoston have agreed to a $675 million resolution to allegations of improper mutual-fund trading -- the biggest settlement in the fund industry scandal so far, regulators said Monday.

Under the settlement, Bank of America (BAC: Research, Estimates) will pay $125 million in fines and $250 million to reimburse investors, while Fleet (FBF: Research, Estimates) will pay $70 million in fines and $70 million in restitution, New York Attorney General Eliot Spitzer said.

The companies also agreed to reduce fund fees charged to investors by $160 million over five years.

The agreement was negotiated jointly by Spitzer's office and the Securities and Exchange Commission.

Eight members of the board of Bank of America's mutual funds unit, Nations Funds, will resign or leave over the next year under the settlement -- in what appeared to be the first time directors of a fund company were targeted in a settlement.

"These directors clearly failed to protect the interest of investors," Spitzer said in a statement.

"They acknowledged the problem of market timing, but then allowed a favored client to engage in that harmful practice. The departure of these board members should sound an alarm for all those who serve in similar capacities."

Spitzer launched the probe of the $7 trillion fund industry last September.

In addition, the banks, which have agreed to merge, said they would make changes in their fund operations, such as the board overhaul.

"The $375 million that Bank of America has agreed to pay and the significant reforms that it has agreed to implement reflect the seriousness of the misconduct in this matter," SEC Enforcement Director Stephen Cutler said in a statement. "We will continue to investigate that misconduct in an effort to hold all responsible parties accountable."

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Bank of America was accused of helping the Canary Capital Partners hedge fund trade mutual funds after-hours at stale prices, known as late trading or market timing, a move that helped Canary but hurt long-term investors in some of the funds.

Canary settled with Spitzer for $40 million without admitting or denying wrongdoing.

Separately, the SEC and Spitzer's office alleged that senior executives at FleetBoston's money-management unit approved secret agreements to let sophisticated investors trade rapidly in mutual funds at the expense of ordinary shareholders.

Regulators said traders engaged in $2.5 billion of rapid-fire transactions in at least seven mutual funds from 1998 to the summer of 2003 at Fleet's Columbia Funds and predecessors.

Bank of America hopes in early April to complete its purchase of FleetBoston, a deal originally valued at $47 billion.

Bank of America said the settlement will result in a first-quarter charge against earnings of 16 cents a share.

Other companies enmeshed in the fund scandal include Bank One Corp. (ONE: Research, Estimates), Janus Capital Group Inc. (JNS: Research, Estimates) and Strong Capital Management.

Bank of America, which uses the promise of "higher standards" in its advertising campaign, has been caught up in various investigations.

Last week the bank agreed to a $10 million SEC penalty for failing to produce documents in a separate probe of trading. It also faces allegations of issuing tainted stock research.

In addition, Italian investigators are looking into BoA's role in the collapse of food company Parmalat Finanziaria SpA.  

-- Reuters contributed to the story