Base line:

There are two servers (ServerOne, ServerTwo) with the following configuration:
OS: Windows server 2012R2
RAM: 3GB
Installed: latest version of vc_redist.x64.exe (relates to visual studio 2017)
MongoDB version: 3.4.6
FCV: 3.4
Engine: wiredTiger
SSL is used: (mode: requireSSL)
security: (clusterAuthMode: x509)
All replica sets are Windows services

Each server has a replica set that comprise two data members + arbiter (Rep1 for ServerOne and Rep2 for ServerTwo)
A third replica set (Rep3) exists. It consist of a data member + arbiter on ServerOne and a data member on ServerTwo.

Schema:

ServerOne win services:
1. Rep1 Data Member 1
2. Rep1 Data Member 2
3. Rep1 Arbiter
4. Rep3 Data Member
5. Rep3 Arbiter

ServerTwo win services:
1. Rep2 Data Member 1
2. Rep2 Data Member 2
3. Rep2 Arbiter
4. Rep3 Data Member

Goal:
We decided to upgrade all replica sets to version: 4.0.4.

Steps:

Step one: We upgraded all replica sets to version 3.6.8 and set the FCV to 3.6
That was finished successfully.

rs-status-result.txt
Step Two: We upgraded Rep1 and Rep2 to version 4.0.4 and set the FCV to 4.0
That also finished successfully.
Then we started to upgrade Rep3. The binaries for all members were replaced to version 4.0.4 and the services were restarted successfully.
When I entered the mongo shell on Rep3 on ServerOne (Primary) and executed the command rs.status() an error was displayed for the other member (located on ServerTwo):
"lastHeartbeatMessage" : "Error connecting to ServerTwo:27011 (10.36.151.137:27011) :: caused by :: The Local Security Authority cannot be contacted"

Attached files:
Rep1 on ServerOne:
ServerOneMember1.cfg
ServerOneMember2.cfg
ServerOneArbiter.cfg

Rep2 on ServerTwo:
ServerTwoMember1.cfg
ServerTwoMember2.cfg
ServerTwoArbiter.cfg

Rep3 on ServerOne + ServerTwo:
Rep3ServerOneMember1.cfg
Rep3ServerTwoMember2.cfg
Rep3ServerOneArbiter.cfg

Result of rs.status() on replica set three:
rs-status-result.txt

Thanks,

Itzik