Hmm I'll have to look. I tried letting the new mame make the .ini and then set the settings according to the ArcadeVGA installation instructions, but that didn't work. Then I tried copying the old mame.ini over, and got the same result.
Googling for this error says to update DirectX, but it is up to date, and I have verified that Direct Draw is indeed working. I'm not sure what is triggering mame to make this error.