I have found where the setting for using a proxy server is. By unlocking the interface and going to "Edit Autoupdate Repository List" you can see the settings, however everytime my clients update policies it changes back to the IP of our internal server. I really need to get this stopped and to have it just use the local IE settings. I can't find a single policy settings for VSE that lets me set the proxy! Very frustrating.
Wow, I'm that awesome I answered my own question. Solution is you set the proxy for VSE not via a VSE policy (which would make sense) but by way of the McAfee agent general policy. Found a proxy tab there, and whala there is my mystery solved.