Thanks for the reply. Unfortunately that is not happing in this case. Both the policy settings that effect alerts and correctly set in the ePO policy and on the client. Also I've tested the policy setting both ways and the same behaviour occurs.
Through ePO, you can go into the server settings and uncheck "1038" in "Event Filtering", this will stop the agent from sending this event to ePO. Other than that it would be a VSE setting. I am moving the thread to VSE for further help.
Thanks for the input. I thought about using an event filter but we used to have this configured this way in our old ePO server. The problem probably is with VSE so I've created a support call with McAfee. We'll see where that goes.