Smart App Control is a feature of Windows 11 that helps to block malicious, untrusted, or potentially unwanted apps from running on your device.
support.microsoft.com
There's a bit more depth of an explanation there, but the TLDR of it is:
1-For developers, this feature, once it's enabled rather massively, will encourage them to sign their software (software signing also means that it's possible to identify a developer in the real world)
2-The order of priorities is like this:
2.1: Check if the app is popular or well-known, if that's the case let it run (my understanding is that by this point Windows Defender or your antimalware of choice already said it's clean)
2.2: if the app isn't popular, check for a signature, if it's digitally signed it can still run, otherwise it's considered not trustworthy.
3-Smart App Control has an "evaluation" mode. In Microsoft's words:
Essentially, we're looking to see if Smart App Control is going to get in your way too often. There are some legitimate tasks that some corporate users, developers, or others may do regularly that may not be a great experience with Smart App Control running. If we detect during evaluation mode that you're one of those users, we'll automatically turn Smart App Control off so you can work with fewer interruptions.
4-Regarding manual whitelisting, there's none. It's turned on or off for everything, no exceptions.
5-About why Microsoft wants a clean install, I quote:
We want to be sure that there aren't already untrusted apps running on the device when we turn Smart App Control on.