Resolution
When the ListManager 'Security' setting in Utilities: List Settings: Email Submitted Content tab is set as 'yes, if the member has a password, then it must be in the body' for the Require password in body field, users need to add the password into the body of the message.
Please note that in:
PASSWORD:your_password
"PASSWORD" must be capitalized, and there may be no spaces.
For example, if you are posting to a list that requires the password in the body, and your password is "sw33t", you would include the following in your messages:
PASSWORD:sw33t
Your password will be automatically removed before your message is distributed so others won't see it.
In the HTML version of the message, the PASSWORD must be after the <body> HTML tag.