As already told in other answers, RFE is a privileged trap instruction. The purpose of RFE is to switch from kernel mode to user mode once the system is done with handling an exception (any interrupt, trap or fault).
Now, let us approach this question through the points given.
It must be a trap instruction - Definitely it must be a trap instruction as RFE is an explicit privileged instruction causing a switch from kernel to user mode
It must be a privileged instruction - Yes, because RFE can be executed only in supervisor/kernel mode
An exception cannot be allowed to occur during execution of an RFE instruction - Yes, because as soon as a trap/interrupt starts being processed all other traps/interrupts are disabled until the current instruction execution is complete.
So, all three are true and answer is (D)