The ScenarioI recently encountered a situation where one application partition stores regular user objects as well as customly created proxy user objects. My AD LDS was set up in a joined-domain where the domain password policies were applied to the AD LDS for both the user objects and for the proxy objects. The proxy objects pointed to user objects in the Active Directory (domain controller). Requirements changed and I now had to disable the domain password policies in the AD LDS for the regular users while keeping them for the proxy users. The problem was that once you disable AD LDS' password policies, you can no longer make use of fine-grained password policies like complexity or password-history. These fine grained password policies were supposed to be kept for the proxy users while being disabled for the regular users. One approach would have been to move the regular users to a different application partition while keeping the proxy objects in the original AD LDS application partition. Due to certain restrictions I could not do this.
Some testing in the lab showed that setting ADAMDisablePasswordPolicies to 1 affects the regular user objects but leaves the proxy user objects untouched. This is the case because the proxy objects only contain an SID pointing to an object held within the AD. Since the actual object resided within the AD, it is unaffected by the ADAMDisablePasswordPolicies flag.
TL;DR: AD LDS does not apply ADAMDisablePasswordPolicies to proxy objects if working with domain policies.