You've got a strange installation. A System Reserved partition belongs to a Legacy install. It is the equivalent of a UEFI install's EFI partition (that holds the BCD & other boot files). Yours is on an MBR (Master Boot Record) style disk (disk 4) which is normal for a Legacy install. But the rest of the Windows installation is on disk 2 which is in the GPT (GUID Partition Table) style. That's normal for a UEFI install. They don't show up in Disk Management (that's normal), but two MSR (Microsoft Reserved) partitions are also on disk 2. There really should be only that first one (of 16 MB), but the presence of an MSR means it is a UEFI install. Legacy installs don't have them.
It looks like you can boot that way, but Windows doesn't appear to want to do an update that way. Have you been able to get Windows updates in that configuration before? Also, it doesn't appear BCDEdit likes it, either.
It seems you want to convert the 2nd MSR (of 554 MB) into an EFI partition, which I think is a good idea. But it can't be done with Set ID. And also the System Reserved partition should be deleted. I'm not really sure I can come up with the instructions to do it all. It would be to...
(a) Delete the 2nd MSR.
(b) Use DiskPart to create an EFI in its place.
(c) Have Windows use that EFI.
(d) Delete the System Reserved partition.