This is expected behavior when this advanced configuration is set to "TRUE". Both Automatic and Interactive tools upgrades will fail.
Per the vSphere 6.5 Security Configuration Guide, this advanced configuration is no longer required in vSphere 6.5. Check the VMware vSphere 6.5 Security Configuration Guide | VMware for more details.
To disable this setting:
Edit the vmx file of the VM:
Use the vSphere Client: