Bank of America Corp.'s board has been told the company could face a public enforcement action if regulators aren't satisfied with recent steps taken to strengthen the bank, said people familiar with the situation.

The nation's second-largest lender has been operating under a memorandum of understanding since May 2009, following repeated tussles with regulators over the purchase of securities firm Merrill Lynch & Co. and a downgrade of the company's confidential supervisory rating. The memorandum, which isn't public, identified governance, risk and liquidity management as problems that had to be fixed, according to people familiar with the document.

In recent months, regulators met with Bank of America's board and said they wanted to see more progress on the bank's compliance with the memorandum. Otherwise the informal order could turn into a formal and public action, which would likely mean intensified scrutiny and greater restrictions as Chief Executive Brian Moynihan tries to shed problems tied to the financial crisis.

Bank of America's directors were taken aback, said people familiar with the situation. It "put the board on the ground," one of these people said.

The threat of an enforcement action is the latest flashpoint in a tense relationship between regulators and Bank of America. Directors believe the bank has met demands set out in the 2009 document. Now, "the board's view is it's time to take us out of the penalty box," said one person familiar with the situation. A bank spokesman declined to comment.

But regulators also have told the board they have become concerned about turnover in key management posts. The latest shake-up was the departure in late October of strategy head Mike Lyons, a member of Moynihan's inner circle who often served as a liaison between the CEO and the board on certain issues.

In less than two years, Moynihan has changed chief financial officers and chief risk officers twice. In September he ousted the head of wealth management and the head of the consumer bank while elevating two other executives to cochief operating officers.

It is unclear when regulators will decide whether more severe measures are necessary. The bank could yet get the existing penalty lifted, the people added.

Informal memorandums, which are rarely disclosed to the public, typically require banks to address specific problems. Companies that don't deal with deficiencies can be served with public actions requiring them to raise capital or get clearance for any major moves, including asset sales.

There are 1,042 banks and thrifts currently operating under formal enforcement actions issued since 2007, according to SNL Financial, which includes cease-and-desist orders, prompt corrective-action notices, capital directives and formal agreement or consent orders in its tally.

Lifting the memorandum of understanding is a major priority for Moynihan, these people said. The document was established after the Federal Reserve and the Office of the Comptroller of the Currency downgraded their overall ratings of the bank to "fair" from "satisfactory" and the Fed said in a letter that "more than normal supervisory attention will be required for the foreseeable future."

Regulators have told the bank that they want to be sure that changes made to governance, risk, capital and credit are permanent and can work over time. A shaky economy and uncertainty surrounding new global capital requirements also are concerns.

Since mid-2009, Bank of America has appointed eight new directors and made a number of internal changes ranging from how it classified credit to risk and liquidity-management controls. After Moynihan became CEO in 2010, he began selling noncore assets and preserving capital as a way of shoring up the bank's balance sheet.

But frustration is building as the two sides now view Bank of America's progress differently, these people said. "The Fed does not believe Bank of America has done all the work," while Bank of America officials believe "they have done all the work and the Fed keeps moving the goal line on them," said one person familiar with the situation.

Regulators are shortening the leash on the nation's biggest banks as they try to prevent future blowups. Like Bank of America, Citigroup Inc. during the financial crisis was slapped with an informal action asking it to fix an array of problems. This year two foreign banks with U.S. operations were given formal orders over violations of money-laundering laws.

Bank of America has experienced other surprises from regulators this year. In March the Fed rejected a request for a modest dividend increase in the second half of 2011 after Moynihan had hinted publicly that one was likely.

Bank of America shares have tumbled 58% this year - the biggest decline among major banks - amid worries about the bank's exposure to mortgage-related legal costs. The shares dropped 29 cents, or 5%, in trading Monday to $5.49.

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