Is small cap conversion done for every word that's written in all capitals? The convention that I'm familiar with (I think from The Elements of Typographical Style) is to only set acronyms - that is, pronounceable initialisms like "NASA" or "PETA" - in small caps. All other initialisms like FBI or USA are set as normal-sized caps. I think the reasoning is that small caps are there to preserve the capitals but not disturb the flow of the text, since it's read as a word just like the words around it. Full caps do disturb the flow of the text because they are not words and not pronounced as words either.
Any word in all-caps is 'converted' to small-caps. This behaviour can be changed, or even disabled, by setting a flag in the options object before processing. I prefer to keep all-caps out of my body text.
Back at Flipboard, for our RSS typography processing, we used a rule of thumb that all-capped words 3 letters or longer would get small-caps treatment. It worked pretty well.
