Solution:

(1) Goto Start>Run type in gpmc.msc (Group Policy Management)

(2) Expand your Domain

(3) Go to <Group Policy Objects> and select <Default Domain Policy>

(3.5 - optional) On the Delegation Tab of Default Domain Policy, you had to add the administrators group with full permissions to edit, delete and modify settings. Just choose Add, type administrators, search, accept and choose permissions.

(4) Back on the left side in the tree, right click on Default Domain Policy and choose Edit

(5) Expand: <Computer Configurations> <Policies> <Windows Settings> <Security Settings> <Account Policies> <Password Policy> 
(6) Disable Password Complexity or change any other settings as desired.

(7) Close Editor, goto start>run and type in gpupdate /force

source:  https://social.technet.microsoft.com/Forums/en-US/c5c93891-fca4-4500-bdf8-74e07b20058b/password-settings-grayed-out-on-domain-controller-local-group-policy-editor-windows-server-2012-r2?forum=winserver8gen

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