When Propagate Materials To Instances is on, any material assignment you make will be propagated to all instances of the object in your scene, including imported AutoCAD blocks and ADT style-based objects; these object types are common in DRF files. Assignments are also propagated to instances of Revit objects and of other instances that you've made in the current scene.
When Propagate Materials To Instances is off, materials are assigned in traditional 3ds Max fashion; each object has a unique material assignment.
Material Editor (Slate or Compact) 