To be honest, we were expecting this question ;-)
You need to read this setting together with the one immediately above:
"Extra Keyboard Keys..."
"... convert to HTML"
When using any of the extra formatting keys that appear above the regular keyboard (this is what you set with the first switch), Notebooks used to automatically convert the note to HTML. We had many users who did not like that, but instead wanted to control when and if a note should be converted to HTML. So, the second switch defines whether Notebooks should automatically convert the note or not.
I hope this clears things up a bit ;-)