It said to report academic misconduct that resulted in disciplinary action. Is a zero on the midterm not disciplinary action? If “your friend” was caught cheating and told to go right on ahead and finish the exam with the cheat sheet…then the case may be a bit different.
That being said, if there is no official record of this, and it will not be reported on applications in any way, then I’d take the mercy and keep it to myself. I’m sure “your friend” will take this as a valuable learning experience.