I noticed that if we use the ExplodeBlock command with the AllBlocks option (to explode any nested block instances) Rhino does do the exploding, but creates a duplicate of the objects. If you cursor select the blocks instead of selecting all, it doesn’t create the duplicate.
Sorry for the late response, I’ve been off all week. Yes, I believe it happens on all blocks after importing the STEP file. Not sure if importing the STEP file is a factor, but it doesn’t seem like it should be. However, that’s the only time we encounter block instances that need exploding.