Well this whole episode has shown me that I have a lot to learn still. The issue is apparently not as black and white as I believed.
I reached out to some engineers I know who have done some major work and while some agreed that lower levels on the way in are a better choice most said "it depends." Here are some excerpts from their responses:
"In practice, I tend to record transient-rich material as hot as I can since but am careful to not use any peak limiters 'to tape' unless I'm very sure what they are doing. I don't get overly concerned if I see some overs in the drum tracks. On the other hand I am more careful with things like vocals and other instruments since by the time you are seeing overs for those types of instruments you are likely to be getting distortion also. And more importantly, not good distortion. That is not to say that I purposefully record them at a low level although I know people that do and they swear it makes a big difference. I just tend to prefer the sound of a mic pre working a little harder which usually means I'm hitting the A/D converter with plenty of level. "
"Certain converters, ESPECIALLY older ones, such as the Digidesign 888|16 and 888|24, as well as consumer grade ones, which do in fact distort BEFORE the red L.E.D. indicator lights up. This is because they ANALOGUE section of the converters were subpar, and you could actualy hear and measure the distortion. SO tkeeping the signal well below that -3dB was a safe thing to do. I would do it IF I was using older digital equipment. BUT the new generation (Pro Tools HD, Apogee Symphony, Rosetta, Motu mk3s, etc.) do NOT have that issue. They have figured out how to not distort their analogue section before the digital one distorts. So now, if using a newer converter, you can in fact record up to -0.5 dBFS if you like, without that analogue distortion ocurring anymore."
"In my opinion, there is nothing wrong about hitting the converters on the way IN as high up as -3dB. This is still conservative enough to be useable, since no distortion will occur. Yoiu should however do a simple input test and measure where YOUR particular hardware distorts. Does it distort BEFORE the red LED? at the same time as the red LED? If I were you, when you have time, measure that, and label it right on your converter, for easy reference always."