I just went through the whole sequence again, with the same results. I can't drink any more coffee or I'll be on the ceiling. (Have switched to tea;). I'll leave it to Mark and/or others to sort this out.
Bottom line: I have a non-owner moderator in my test group with no permissions who has the complete panel of notification options available in their subscription page. Toggling this mod back and forth between set-moderator-privileges on and off has no effect. The complete notification panel is available no matter what.
I'll leave it at that for now. I am concerned about this from a practical point of view because, as I said originally, I just promoted someone to moderator status in my group and I am concerned about her having the abiity to elect to see notifications she should not. So unlike in some cases where I comment in beta, it's not just an intellectual curiosity.
Messages are the sole opinion of the author, especially the fishy ones.