(Adds comments, history of missteps)
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 worked at Wells Fargo & Co, according to an investigation into potential conflicts of interest.
The two-month probe, 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.
Yet the investigation into Dudley's emails and text messages could heighten concerns over conflicts at the New York Fed, which since the financial crisis has stumbled in its supervisory role as the central bank's eyes and ears on Wall Street.
The May-July probe was conducted by an outside law firm and its conclusion was accepted by the New York Fed's board. Dudley, an influential rate-setter and close ally of Fed Chair Janet Yellen, said in a statement his repeated omissions dating back to 2007 were inadvertent and embarrassing.
A former partner at Goldman Sachs, Dudley has scolded bankers for years for lax ethics and poor culture that has not improved enough since the 2007-2009 crisis, singling out Wells in particular for its growing fake-accounts scandal.
Friday's public disclosure 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.
It follows 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 comes 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 caused 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 to determine conflicts, 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.
"Any information of this kind coming out late is highly problematic," said Lisa Gilbert, vice president of legislative affairs at consumer rights advocacy group Public Citizen, which has called for Congress to investigate Wells Fargo. Such disclosures by regulators are extremely important, she said, so "they gain our trust and show us they are truly representing Main Street."
Wells Fargo, based in San Francisco, does not fall under the New York Fed's direct regional supervision. And Dudley is not on the Fed Board of Governors that sets national regulatory policy.
Yet he is a respected voice in decisions influencing large firms such as Wells, the second-largest U.S. bank by market value, and he often represents the Fed internationally.
"I deeply regret this omission and am embarrassed by my failure to read these important disclosures more thoroughly," said Dudley, who joined the New York Fed in 2007 as head of markets.
Dudley became president in 2009 and his term expires in early 2019. In that tenure, the New York Fed's former chairman resigned amid questions over buying stock in his former firm, Goldman; it was slammed for failing to spot the risky trades leading to JPMorgan's massive "London Whale" losses; and a former employee was found to have leaked confidential documents to a friend at Goldman, where they were circulated.
The law firm reviewed Dudley's communications and the Fed's market and supervisory activities and concluded he was not involved "in any action or decision directly affecting" Wells Fargo or his sibling's employment there.
Sara Horowitz, chair of the New York Fed's board, called it a "relatively minor violation" of the internal code. Dudley received notice that future violations "could lead to escalation of disciplinary action," said the New York Fed, which also clarified its employee disclosure form. (Reporting by Jonathan Spicer in New York; Additional reporting by Michelle Price in Washington; Editing by Tom Brown and James Dalgleish)