That is correct, you should generally set chroot_local_user=YES. If you left it set as chroot_local_user=NO, and have the lines
Then you have some syntax wrong in the chroot_list file, or the permissions are off on that file.
I find it much easier to chroot everyone. Because of the permissions structure, regular users can't put things to non-home directories, and if you need to ftp a system file off of the machine, it is much easier to use the scp command from the machine to another through SSH.