This cosmetic issue can be ignored as per the Impact section above.
To workaround the issue the Specify password field in a VM's Guest OS Customization settings can be populated with a value.
When the Auto generate password, Require Administrator to change password on first login, Allow local administrator password are then Disabled the Auto generate password option will no longer show as Enabled.
WARNING: If the Specify password field is populated and Allow local administrator password is Enabled then Cloud Director will attempt to apply this password to the VM.