Kevin,
To be honest, I'm struggling with somewhat the same thing, but maybe I can help. The "Step fail causes sequence fail" will report UP to the calling sequence step, that the step (in the subsequence) failed. Therefore the SubSequence Call step will indicate a failure.
By unchecking the "Record Results", the subsequence step will not record the results.
I've configured all of my subsequence (library functions) to NOT generate ANY form of entry into the log, including any failures. However, each one does return a string parameter variable that indicates it's function in some manner.
There is an option in the Configure menu, Report Options, the "Result Filtering Expression" ring that my help you as "Record All Results", "Exclude Passed/Done/Skipped" (Faile
d only) and "Passed and Done Only".
Hope this helps.
Mike