The picture that you are referencing Cim was taken right after I cut the AVM off, before I pulled that birf out. I was pulling it out to replace it with a chromoly nitro birf that does have both grooves already cut. So the issue was not related to the groove, the hub body fit on and the c clip snapped right into the inboard groove as expected.
The issue was with connecting the selector ring/face of locking hub to body of locking hub. The internal locking mesh ring (I am sure there is a technical name for it) would engage and disengage as expected, until I tightened the 6 10mm face screws down all the way. That was creating too much pressure against the inside of the selector dial, making ir so that you couldn't turn it by hand.
There is a gasket that goes between the hub body and sector ring/hub face. With the one gasket in place I had the issue. I then took the same gasket from my 2nd locking hub (which I wasn't planning on installing yet as I don't have a passenger side birf with the 2nd groove cut) and doubled up the gasket on the drivers side.
This effectively spaced out the face of the hub from the body of the hub by about 15-20 thousandths, which was all it needed to fix the issue.
I just took the truck for a 30 minute shake down and so far all good. Ready to go camping tomorrow...err I mean today.
Very odd issue to come across, I will need to get a couple more gaskets for the passenger side before I swap that one in.