A federal judge criticized on Monday a proposed settlement between the U.S. Securities and Exchange Commission and Bank of America Corp over the payment of bonuses to Merrill Lynch & Co executives.

The largest U.S. bank agreed on August 3 to pay $33 million to resolve an SEC civil lawsuit accusing it of misleading shareholders by not disclosing it authorized the payment of up to $5.8 billion of bonuses to Merrill employees. About $3.6 billion was ultimately awarded and the bank did not admit wrongdoing.

Judge Jed Rakoff of the federal court in Manhattan put the settlement on hold, wanting to determine if it was fair to the public.

At a hearing on Monday, he called the settlement amount a tiny, tiny fraction of the bonuses. Noting that Bank of America received $45 billion of taxpayer money from a federal bailout program, he speculated whether one might argue that that's where the money's coming from, from Uncle Sam.

Rakoff also appeared skeptical that Kenneth Lewis and John Thain, the chief executives of Bank of America and Merrill, should not be held to account for the decision not to disclose the bonuses to shareholders before they voted on the merger.

If you are correct that this proxy statement was materially misleading, then at a minimum Mr. Thain and Mr. Lewis would seem to be responsible for that, Rakoff told an SEC lawyer.

Maureen Lewis, an SEC lawyer, responded that Lewis and Thain relied on the lawyers' advice and didn't know what was in the disclosure schedule.

According to the SEC complaint, Bank of America told investors in proxy documents that Merrill agreed not to award bonuses or incentive pay before the merger closed, when in fact the bank had authorized Merrill to pay bonuses.

The $33 million penalty was below the $50 million that General Electric Co agreed last week to pay to settle SEC fraud charges.

Lawyers said it is rare for judges to delay so-called SEC consent agreements, but Rakoff has done it before.

In 2003, he blocked a $500 million settlement with WorldCom Inc over the accounting fraud that led to the phone company's bankruptcy. He later approved a $750 million payout.

The Merrill merger has weakened Lewis, whose bank faces many lawsuits, regulatory probes and anger of shareholders and lawmakers over the bonuses and the extent of Merrill's losses.

Since April, Lewis has lost his job as chairman and more than half the members of his long-supportive board of directors. The bank's shares are down by roughly half since the merger was announced last September 15.

The case is SEC v. Bank of America Corp, U.S. District Court, Southern District of New York (Manhattan), No. 09-6829.

(Reporting by Jonathan Stempel; editing by Andre Grenon)