Hi @Ryan ,
Per my test this works fine and only people in the security group can share externally.
Make sure the specific user sharing the file or folder is a member of the security groups under external group settings.
Try to delete the specific user from the group and add it again.
If the issue still exists, switch to another user in the security group, then check whether the user could successfully share externally .
More information for your reference:
https://learn.microsoft.com/en-us/sharepoint/sharepoint-onedrive-error-message#ose304
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