All of mine are late 261's and they work as I have stated. If you plug both lines at the block and get oil to the rockers, it's in bypass. If you get NO oil to the rockers it's because you blocked the path via the dowel.
The full flow path is:
The front outlet - pulls oil directly out of the pan and goes nowhere else until it flows through the filter and into the engine via the rear inlet. Plug either of those and the engine is starved completely. You must use a full flow filter that does NOT have a restrictor.
Bypass: You can plug either or both holes and there is an internal passage that will allow oil to get through.
So, if you think it is currently in full flow, there is no oil going to the rockers as pictured. Pushed all the way in, full flow. Remember though, once you push it in, you can't easily pull it back out so you want to make sure of your decision to go with full flow.
