I think it's a ridiculous arguement, one about splitting hairs and such, particularly the rule about your letters on other chapters' shirts.
The issue as I see it has two key items. 1) Non-initates (whether pledges or non-members) don't know what the letters mean, and so there is no "respect" and 2) Your worried about people doing things wearing your letters that might reflect poorly on your organization.
- If your letters are on a Greek Week shirt, such that is put out by the Office of Greek Affairs, then everyone's letters are out there and by wearing that shirt, you're representing your Greek community. End of story, it doesn't matter that your letters are on there, and people don't know what they mean, but you know what, they don't know what the other 10, 15, 30 other sets of letters mean either. What makes your organization so much more special.
- If it's because the pledges who will likely become full members don't know the significance, you can't tell me there aren't other things that you can restrict usage of. Some people have already mentioned crests and insignias. My own chapter bans the use of "Wooglin" and "-kai-" by pledges and they aren't allowed into our chapter room as a sort of deference to the active members. Let them have the letters, so that when they go out and do good things, people can recognize them. That's the best publicity you can get.
- If you're worried about future members doing disgraceful things, then you need to look at who you're pledging, and what your pledge education program is teaching them. One of the first things should be don't do anything stupid with letters on. AND EXPLAIN TO THEM WHY!!! This whole "you don't understand" BS is not legitimate and completely arbitrary b/c within months they will know.
Tell them that they are representing not only themselves, but also the chapter AND the larger organization as a whole. The reputation that they wish to build for themselves is now tied to the actions of others who bear the name of your org. and any sort of action (whether it's a drunk driver in another state, or their big bro/big sis) is going to reflect on them whehter they like it or not. That is a more legitimate reason and one that serves to bring them in to the idea that the chapter is only part of a bigger whole. And it is a lesson that remains important throughout their lifetime, not just when they find out the meaning. This is one way to battle the alumni apathy that so many complain about.
Really in the grand scheme of things this is piddly. We should be worried far more about many other things than this.