A financial institution's employee, David, is approached by a high-net-worth client, Mr. Lee, who offers David a substantial 'finder's fee' for referring his business to a specific offshore investment product not offered by David's firm. David's firm has strict policies against accepting external compensation for referrals outside approved channels. What is David's primary ethical and regulatory obligation?

Question: A financial institution's employee, David, is approached by a high-net-worth client, Mr. Lee, who offers David a substantial 'finder's fee' for referring his business to a specific offshore investment product not offered by David's firm. David's firm has strict policies against accepting external compensation for referrals outside approved channels. What is David's primary ethical and regulatory obligation?

Answer options: ✅ To decline the offer and report the incident to his firm's compliance department, as it constitutes a potential conflict of interest and breach of firm policy.

• To accept the fee discreetly, as it does not directly involve his firm's products and Mr. Lee is a sophisticated investor.
• To accept the fee but ensure he fully discloses it to Mr. Lee and documents the arrangement.
• To consider only if the offshore product is genuinely beneficial for Mr. Lee before making a decision.

Correct answer: To decline the offer and report the incident to his firm's compliance department, as it constitutes a potential conflict of interest and breach of firm policy.

Explanation: Registered individuals must avoid situations that could create actual or perceived conflicts of interest, and accepting undisclosed compensation from external parties for referrals typically violates firm policies and ethical standards regarding fairness and integrity. Reporting such offers to compliance is essential.