WASHINGTON — Two watchdogs have cleared the Federal Reserve Board and Federal Deposit Insurance Corp. of any wrongdoing related to unauthorized leaks of the Volcker Rule last year.

Policymakers raised concerns after American Banker published a draft of the Volcker Rule proposal on Oct. 5, six days before it was officially released by the banking agencies. The leak, combined with earlier media reports on different variations of the Volcker Rule, has been under investigation for several months.

But the inspectors general for two of the agencies that developed the plan — the Fed and FDIC — found nothing to implicate officials at either regulator.

"Our review noted several apparent instances of unauthorized disclosures that occurred during the rulemaking process," the Fed's IG said in a 32-page report released last week. "We did not find any evidence, however, to indicate that the unauthorized disclosures originated at the Board or" the Federal Reserve Bank of New York.

Meanwhile, the FDIC's watchdog had wrapped up its review of the events before the end of 2011. "We did not identify any evidence and nothing came to our attention to suggest that FDIC officials released the draft rule early," FDIC Inspector General Jon Rymer wrote in a one-page memorandum to acting FDIC Chairman Martin Gruenberg, dated Dec. 6.

The roughly 200-page draft Volcker Rule released in early October outlined details of how the agencies could carry out Dodd-Frank Act provisions banning banks' proprietary trading and severely limiting their activities with hedge funds. (The restrictions are popularly named for former Federal Reserve Board Chairman Paul Volcker, who first put forth the idea for the ban.)

While the Fed watchdog found no wrongdoing among the central bank's staff, it indicated that at least someone in the industry also had obtained a draft. The IG also issued three recommendations for improving the confidentiality of the rulemaking process, including more formal information-sharing guidelines for interagency rulemakings, steps to restrict access to a shared network drive used by the Fed's legal division and staff reminders about the importance of email encryption.

The Fed IG interviewed 20 staff members from the central bank involved in writing the rule, including 10 from the New York bank, as well as the agency's general counsel and an official in the Public Affairs Office. The watchdog said it "also conducted a targeted analysis of certain Board rulemaking team members' e-mail communications and phone logs."

(American Banker was not contacted by either the Fed or FDIC IGs as part of their investigations).

The Fed IG's findings included that early drafts had been distributed to about 70 employees from the banking agencies via emails "that were not always encrypted." As early as June, some at the regulators suspected a "media source" was aware of the interagency deliberations, and the email distribution list was shortened. While the American Banker story is mentioned numerous times in the report, the IG refers to other publications as well. Starting with a news article in August 2011, about five articles from different outlets included inside information about the proposal, the report said.

The report said a former Fed official, now working at a law firm, attached a copy of a nonpublic draft in an email to someone at the Fed, who was working on the rule, to inquire about the rule's progress. But that draft was different from the one published by American Banker. The attorney, who was interviewed for the IG report, said another attorney at the firm had received the draft from a client.

"The former Board employee chose not to identify the client who provided the draft … to the law firm," the Fed IG report said. "In the former Board employee's opinion, an attorney at the law firm receiving the draft NPRM from a client constituted a protected communication covered by the attorney-client privilege."

The Fed IG review also revealed the impact of the leaks on the rulemaking process, with staff members at the central bank noting that "the unauthorized disclosures of the draft … had a negative impact on the 'interagency rulemaking dynamic.'"

"The unauthorized disclosure to American Banker circumvented the rulemaking process by publishing the draft version before the intended issuance of the final" notice of proposed rulemaking, the report said. "The unauthorized disclosures that occurred throughout the drafting of the [notice of proposed rulemaking] compromised the integrity of the rulemaking process. Board interviewees noted that interagency teams need trust and open dialogue to effectively carry out a joint rulemaking."

A response to the report by Scott Alvarez, the Fed's general counsel, said he and the central bank's head of information technology have already taken steps to communicate appropriate encryption methods to employees. "The Federal Reserve staff maintain the highest standards of integrity and respect the importance of maintaining the confidentiality of agency work product and nonpublic supervisory information," Alvarez wrote in the response.

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