Final Answer:
Raise the functional level of the domain. Therefore option D is correct.
Step-by-step explanation:
Upgrading the functional level of the domain to at least Windows Server 2008 R2 would enable the creation of Password Settings objects (PSOs) using Active Directory Administrative Center. PSOs were introduced in Windows Server 2008, and the ability to create them via the graphical interface (Active Directory Administrative Center) requires the functional level to be at least that version. By raising the functional level, you'd enable the domain to leverage the advanced features available in newer Windows Server versions, granting the necessary permissions to create PSOs using the Active Directory Administrative Center.
Raising the functional level doesn't require upgrading all domain controllers immediately; it's a step that allows the domain to use the advanced functionalities available in newer Windows Server versions. This action specifically enables the use of features introduced in Windows Server 2008 R2 and later, such as PSOs. Transferring the PDC emulator operations master role to DC1 or modifying the Group Policy Creator Owners group won't directly address the issue of creating PSOs via Active Directory Administrative Center. Instead, raising the functional level ensures that the domain supports these newer features, allowing for the creation of PSOs using the graphical interface.
Raising the functional level should be performed with caution, ensuring compatibility with all existing domain controllers and applications, and backups should be taken to prevent any potential data loss. It's a crucial step in taking advantage of the enhanced capabilities of newer Windows Server versions within the Active Directory environment without requiring immediate upgrades for all domain controllers. Thus option D is correct.