I hear this from various people but can not find chapter & verse reference to it. Can you please provide Boeing reference to explain why.
FCTM:
For airplanes with FMC U10.7 or earlier, autopilot engagement is normally delayed until the flaps are up and LVL CHG is selected. This allows the AFDS to remain in the TO/GA mode during flap retraction.
I can't tell you if those are Boeings words or words of my operator. I note that it is not a prohibition but a recommendation. Recommendations are generally regarded as SOPs by my operator, unless an overriding safety consideration is applicable.
I believe the reason is that TO/GA "knows" you have an engine failure, and will pitch appropriately. LVL CHG does not know you have an engine failure, and will only pitch for bug speed, including possibly commanding a descent if you are below bug speed. The comment above regarding 500fpm is not correct.