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UPDATE 1-Dudley broke code of conduct in Wells disclosure misstep -NY Fed

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NEW YORK, Sept 1 (Reuters) - William Dudley, a tough-talking U.S. regulator who heads the Federal Reserve Bank of New York, violated a code of conduct by failing to disclose that his half-sister was an employee at Wells Fargo & Co, according to an investigation into potential conflicts of interest.

The two-month probe into Dudley's actions and correspondence, which the New York Fed made public on Friday, concluded that the omission did not violate U.S. ethics laws, had no bearing on the U.S. central bank and would not have necessitated a waiver or recusal.

The May-July probe was conducted by an outside law firm and the conclusion was accepted by the New York Fed ethics office and its board of directors. Still, it could accelerate congressional efforts to tighten oversight of the Federal Reserve, including proposed legislation that would subject the New York Fed president's job to Senate approval.

Dudley, an influential rate-setter and close ally of Fed Chair Janet Yellen, said in a statement the omission dating back to 2007 was inadvertent and embarrassing.

As the central bank's eyes and ears on Wall Street, he has scolded bankers for years for lax ethics and poor culture that has not improved enough since the financial crisis, singling out Wells in particular for its growing fake-accounts scandal.

Friday's public disclosure followed the abrupt departure four months ago of the Richmond Fed president after he acknowledged he may have disclosed confidential information during a conversation with a Wall Street analyst. It also came less than five months after the Bank of England's deputy governor resigned for making a similar omission.

In that incident, Charlotte Hogg failed to declare a potential conflict of interest about her brother's role at Barclays Bank, prompting an unprecedented rebuke from Britain's parliament. Indeed, her resignation prompted Dudley and some colleagues to wonder in April whether similar disclosures were necessary at the Fed, according to the investigation report by law firm Jenner & Block LLP.

The Fed requires such disclosures so that it can determine whether there are conflicts and whether recusals are necessary, though it does allow siblings to be employed at regulated financial firms. Dudley's half-sister was a product management executive at Wells until last year, the disclosure said.

Wells Fargo, based in San Francisco, does not fall under the New York Fed's direct regional supervision. (Reporting by Jonathan Spicer; Editing by Tom Brown)