If this is a suggestion simply to reform the abuse of handpicking into soc factions, I'd +1. However, if it's a suggestion to allow "higher ups"(As that word has been thrown around, but no one has suggested a formal rank) to start micro-managing/puppetting faction leaders, it's a no from me. As you've said, Option B would be server suicide. Unless you're telling me that Gildarts or Garnet himself would handpick leaders for factions, that would just put factions in the hands of "vets with clout" who will leave in 2 months time. Argue all you want, this is tried and true. Latest example less than 2 weeks ago, GB. I won't continue on about that, because you yourself has said that Option B is stupid.
Here's why I personally think Option A is equally stupid. Keeping the same leaders and wiping the enlisted won't improve anything, it will only serve as an unnecessary disruptor. Telling faction leaders all of their faction members are gone will cause 1 of 2 things. 1, the faction leaders will leave. Or more likely 2, faction leaders will get the same people who were removed back into their faction regardless of the amount of time it takes. TL:DR It will do nothing but make it take about 2 weeks to get back to where you are in the current moment.
My recommendation is to not wipe anyone from any faction, and instead implement the rules as a "clean slate". No one gets removed, no one else gets handpicked. Shaming handpicking is cool and all, but it would be completely ignorant to say "anyone who was handpicked regardless of when doesn't deserve to be in their faction. Throughout my time as general I had some regrettable handpicks, but I'd say majority of them significantly helped out the faction throughout their stay, "earning" their spot so to speak. There's no need to dramatically hit the server with roster wipes when you can just implement systematic rules to promote gradual change on top of it.