On my computer the vlcrc file is stored in the %AppData%\vlc folder. The only settings you need are...
I normally recompile the VLC installer using NSIS and add the switches below to every file association and shortcut. This has the same effect as modifying the registry.
# Ask for network policy at start (boolean)
# Activate the updates availability notification (boolean)
Another thing you can do to prevent VLC from checking for updates (e.g. via the Help menu) is to block the website below on your proxy or firewall.