Well, I don't think the problem is necessarily Iron Armbands fault - rather, the Armbands are simply revealing an incongruity that already exists in the rules.
The problem is, what basically amounts to "hitting several enemies at a time with my weapon" has different mechanics under the rules. Since the Armbands key off a particular mechanic, it produces the seemingly odd result of getting the Armband bonus for sojme whacks with your weapon and not with others.
Not really. To a large extent, a close attack is simply a way of expressing a melee attack vs. all nearby targets. Clearly, you need
some way of expressing the area of effect of a power, and it's a 4e simplified and standardized these. So far, so good: the distinction between close and melee (for instance) exist to
serve the purpose of identifying the area of effect. There are a few other minor differences (say, one damage roll vs. many), but these seem to be largely practical simplifications without much impact to the common sense of the situation.
So, the game has a mechanic for hitting one nearby target, and it has a short-cut (and most importantly a standardized, unambiguous) mechanic for hitting multiple nearby targets. That's handy so you don't need to respecify stuff on each power. However, if you hit, it doesn't matter how the area was described. If a power deals 1[W]+Str damage, that damage is dealt regardless of how the area of effect was described. To this extent the rules are written to simply handle the aspects of area-of-effect powers.
Using such mechanical shortcuts as triggers in and of themselves however, poses problems. All of the sudden swinging a blade at all adjacent enemies somehow becomes something fundamentally distinct from swinging a blade at several adjacent enemies. It's not clear why that makes sense - and the lack of fluff on the item underlines this fuzziness.
There's a fundamental distinction between approaching rules design from the standpoint of "I want to represent and roleplay this fantasy with as simple a ruleset as possible" - whereby you expect and accept imprecisions and corner-cases in your quest to make the whole somewhat consistent - and the standpoint of "I've got this ruleset, and this effect can be described within it" - whereby you reliquish the aim to actually represent the story you're roleplaying.
This latter standpoint is deeply unfortunate. For instance, it makes DM adjudication much more complex; all of the sudden you cannot presume that there's any common sense in any particular mechanic; you can't make a quick call based on what it represents because, well, it doesn't represent anything. Where's the distinction between an unintentional and abusive cornercase you should ban and a neat tactical trick?
Most boardgames have clearcut rules; anything in them is fair game. This works because such rules are short and consistent. D&D, by contrast, uses a hugely complex rule system. It's not assumed that every possible rule interaction is balanced, reasonable or even consistent. That's OK not only because there's an arbiter but more basically because everyone essentially understands what the rules are trying to achieve. After a high-jump, you first fall back down to the ground and can then jump again - you can't jump 10 ft high and then jump again mid air to reach 20ft - why? Not because this scenario is clearly described in the rules.
They even explicitly suggest that effects that don't make sense should just be refluffed until they do. You can drop an ooze prone, though it's not clear what that means. Can I refluff two consecutive jumps?
To be able to play a game like D&D, in which the rules aren't limited, predictable and consistent, it's very helpful to have some measuring stick; some guideline that helps determine what goes and what doesn't.
Because the divide between fluff and mechanics is so large, players are enticed to thinking in terms of mechanics and not fluff. When the rules get confusing and don't clearly map to any in-game situation it's no longer about what your character can do, it's about applying rules without regard for what it represents. In a cave, the halfling will happily move through the prone gelatinous cube, but his player needs to look up whether he can move through the bat swam. Can the tiefling completely ignore the fire-damage dealing monster behind him to avoid being flanked by it and giving another monster (that can hurt him) CA? Can the blind cleric heal his friend without knowing exactly where he is? There's very little common sense; it's just knowing the (complex) rules, and they compete for attention with the narrative to the detriment of the game.
Personally, I think its one of those situations where it is best not to try to justify it "in game", and simply recongnise that its for game balance reasons - I mean, its not like the Armbands aren't powerful enough as it is.
Well, the balance problem is easy to fix just by making the item weaker. In any case what you say is how I would run it if absolutely necessary. But the more of these kind of inconsistencies crop up, the harder it gets to avoid either making inconsistent rules (which are unpredictable, unfun, and unfair to players), unreasonable rulings (since it's much harder to determine what's reasonable if it's not clear what a certain effect actually
is), or discussions about rulings. I've definitely seen many more at-the-table rule discussions in 4e than in 3.5; and that's not because the mechanics of 4e are more complex; it's because it's unclear what they're trying to do.
So, I'd much appreciate it if mechanics had a clear purpose and fluff. If the best way to use a rule is to ignore what it means in-game, you're dealing with a tricky rule that will lead to trouble and that undermines the core role-playing fantasy aspect of the game. Maybe you can't avoid all such rules - but I'm sure you can avoid it for optional items.