Properly understanding the error Cannot use the ROLLBACK statement within an INSERT-EXEC statement - Msg 50000, Level 16, State 1 - sql-server-2016

Question

I understand there is a regularly quoted answer that is meant to address this question, but I believe there is not enough explanation on that thread to really answer the question.
Why earlier answers are inadequate
The first (and accepted) answer simply says this is a common problem and talks about having only one active insert-exec at a time (which is only the first half of the question asked there and doesn't address the ROLLBACK error). The given workaround is to use a table-valued function - which does not help my scenario where my stored procedure needs to update data before returning a result set.
The second answer talks about using openrowset but notes you cannot dynamically specify argument values for the stored procedure - which does not help my scenario because different users need to call my procedure with different parameters.
The third answer provides something called "the old single hash table approach" but does not explain whether it is addressing part 1 or 2 of the question, nor how it works, nor why.
No answer explains why the database is giving this error in the first place.
My use case / requirements
To give specifics for my scenario (although simplified and generic), I have procedures something like below.
In a nutshell though - the first procedure will return a result set, but before it does so, it updates a status column. Effectively these records represent records that need to be synchronised somewhere, so when you call this procedure the procedure will flag the records as being "in progress" for sync.
The second stored procedure calls that first one. Of course the second stored procedure wants to take those records and perform inserts and updates on some tables - to keep those tables in sync with whatever data was returned from the first procedure. After performing all the updates, the second procedure then calls a third procedure - within a cursor (ie. row by row on all the rows in the result set that was received from the first procedure) - for the purpose of setting the status on the source data to "in sync". That is, one by one it goes back and says "update the sync status on record id 1, to 'in sync'" ... and then record 2, and then record 3, etc.
The issue I'm having is that calling the second procedure results in the error
Msg 50000, Level 16, State 1, Procedure getValuesOuterCall, Line 484 [Batch Start Line 24]
Cannot use the ROLLBACK statement within an INSERT-EXEC statement.
but calling the first procedure directly causes no error.
Procedure 1
-- Purpose here is to return a result set,
-- but for every record in the set we want to set a status flag
-- to another value as well.
alter procedure getValues #username, #password, #target
as
begin
set xact_abort on;
begin try
begin transaction;
declare #tableVariable table (
...
);
update someOtherTable
set something = somethingElse
output
someColumns
into #tableVariable
from someTable
join someOtherTable
join etc
where someCol = #username
and etc
;
select
someCols
from #tableVariable
;
commit;
end try
begin catch
if ##trancount > 0 rollback;
declare #msg nvarchar(2048) = error_message() + ' Error line: ' + CAST(ERROR_LINE() AS nvarchar(100));
raiserror (#msg, 16, 1);
return 55555
end catch
end
Procedure 2
-- Purpose here is to obtain the result set from earlier procedure
-- and then do a bunch of data updates based on the result set.
-- Lastly, for each row in the set, call another procedure which will
-- update that status flag to another value.
alter procedure getValuesOuterCall #username, #password, #target
as
begin
set xact_abort on;
begin try
begin transaction;
declare #anotherTableVariable
insert into #anotherTableVariable
exec getValues #username = 'blah', #password = #somePass, #target = ''
;
with CTE as (
select someCols
from #anotherTableVariable
join someOtherTables, etc;
)
merge anUnrelatedTable as target
using CTE as source
on target.someCol = source.someCol
when matched then update
target.yetAnotherCol = source.yetAnotherCol,
etc
when not matched then
insert (someCols, andMoreCols, etc)
values ((select someSubquery), source.aColumn, source.etc)
;
declare #myLocalVariable int;
declare #mySecondLocalVariable int;
declare lcur_myCursor cursor for
select keyColumn
from #anotherTableVariable
;
open lcur_muCursor;
fetch lcur_myCursor into #myLocalVariable;
while ##fetch_status = 0
begin
select #mySecondLocalVariable = someCol
from someTable
where someOtherCol = #myLocalVariable;
exec thirdStoredProcForSettingStatusValues #id = #mySecondLocalVariable, etc
end
deallocate lcur_myCursor;
commit;
end try
begin catch
if ##trancount > 0 rollback;
declare #msg nvarchar(2048) = error_message() + ' Error line: ' + CAST(ERROR_LINE() AS nvarchar(100));
raiserror (#msg, 16, 1);
return 55555
end catch
end
The parts I don't understand
Firstly, I have no explicit 'rollback' (well, except in the catch block) - so I have to presume that an implicit rollback is causing the issue - but it is difficult to understand where the root of this problem is; I am not even entirely sure which stored procedure is causing the issue.
Secondly, I believe the statements to set xact_abort and begin transaction are required - because in procedure 1 I am updating data before returning the result set. In procedure 2 I am updating data before I call a third procedure to update further data.
Thirdly, I don't think procedure 1 can be converted to a table-valued function because the procedure performs a data update (which would not be allowed in a function?)
Things I have tried
I removed the table variable from procedure 2 and actually created a permanent table to store the results coming back from procedure 1. Before calling procedure 1, procedure 2 would truncate the table. I still got the rollback error.
I replaced the table variable in procedure 1 with a temporary table (ie. single #). I read the articles about how such a table persists for the lifetime of the connection, so within procedure 1 I had drop table if exists... and then create table #.... I still got the rollback error.
Lastly
I still don't understand exactly what is the problem - what is Microsoft struggling to accomplish here? Or what is the scenario that SQL Server cannot accommodate for a requirement that appears to be fairly straightforward: One procedure returns a result set. The calling procedure wants to perform actions based on what's in that result set. If the result set is scoped to the first procedure, then why can't SQL Server just create a temporary copy of the result set within the scope of the second procedure so that it can be acted upon?
Or have I missed it completely and the issue has something to do with the final call to a third procedure, or maybe to do with using try ... catch - for example, perhaps the logic is totally fine but for some reason it is hitting the catch block and the rollback there is the problem (ie. so if I fix the underlying reason leading us to the catch block, all will resolve)?