There can be quite a few config options that affect this, I went through this with PTC support ~10 years ago. I made a config file called merge.pro that has every reference scope config option (they may have added some new ones since then):
In Reply to David Haigh:
Found the problem thanks to a suggestion by Ron Grabau.
default_ext_ref_scope was set to None, setting it to All fixed the issue.
I need to make a mapkey to toggle this setting.