The rulebook is a blue version of the box cover. You're probably remembering that. It did indeed stop at 3rd and players were encourage to switch to AD&D after that. The weird thing is that the monsters included some that were way above the ability of 3rd level characters.
In Dragon #52, in an article about the new (Moldvay) Basic Set, Holmes writes:
"I’m glad to see Moldvay included the dragons just as I did in the first edition. It seems almost silly to describe dragons in a book intended only for player characters up to the third level. On the other hand, think how disappointed you would be if you were an inexperienced player who bought a DUNGEONS & DRAGONS game and found nothing about dragons inside!"
And in the Holmes Basic rulebook he actually addressed how to creatively use higher HD monsters:
"There is endless opportunity for inventiveness in the game, however, and if a high hit dice monster is desired, ways can be invented to scale it down so that a low level party can have a chance of defeating it. If one wanted to use a chimera, for instance, in a campaign with low level characters, the creature could be scaled down. Maybe it ran into a high level magic-user and was partially shrunk by a magic spell, reducing its hit points. Or there might be a special magic sword, effective only against this chimera, hidden in the dungeon, and the adventurers given a hint or a legend that might lead them to it. In the interest of maintaining the balance of the game, however, a small or weak monster must not have a treasure anything like the hoard of a normal monster."
[In Holmes' original manuscript (linked above by JeffB), Holmes had "dragon" here instead of "chimera".]
So we can see that Holmes was aware of this issue. He also wrote in Dragon #52: "I struggled very hard to make all these things clear to the readers of the first Basic Rules and yet retain the flavor and excitement of the original rules."
So I think Holmes kept some of the higher HD monsters in the Basic rules because he wanted to preserve the flavor of the original game. He was also somewhat limited in that there weren't all that many low HD monsters that had full stats in the original game. Much of the vermin fell under a catchall "Small Insects or Animals" or "Large Insects or Animals" in the OD&D rules (In the manuscript, Holmes represented these with an entry for "Giant Animals or Insects", but TSR deleted this). Stuff like Giant Rats, Giant Centipedes, Giant Ants, Giant Spiders, none of these were fully described in OD&D and thus aren't even in the 1st edition of the Holmes Rulebook. TSR added them to the 2nd edition of Holmes after the Monster Manual had come out and included them with full stats for the first time.
Moldvay had more low HD creatures to start with, and added a number of others that were new to create a monster set focused solely on lower HD creatures (though he still had Dragons of all ages). Holmes had stuck solely with creatures that were already described in the OD&D rules.
