This is simply a hard limit in the game - every team only has 200 spots for roster players, so cannot display more than that at any level.
The AI shouldn't be trying to fill teams to that level. The only reason I can imagine is that it tries to fill each level to only about 30-35 max, and then all excess players will go to the last team. And if you don't allow the AI to release players, then they will all pile up at the lowest level, so you might need to make sure that players get released as you go.
We'll have a look at the file as well once we get a chance and see if there's something else the AI can do to avoid this, but the best strategy is obviously making sure that you clear out the excess players
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