Not sure if this is a bug or not, but it was definitely an irritation.
Workaround included.

My server (2003) runs a script several times a day that pulls files off of a
remote FTP site. It downloads the files into a temporary directory, then
sorts them accordingly. It turns out that the permissions from the -remote
ftp server- were being retained during the download, which was preventing
people from being able to use the files locally. This behavior goes against
every scrap of documentation that I have been able to locate, but the
permissions set by the -remote ftp server- were being retained.

I even followed the directions in http://support.microsoft.com/kb/310316 by
adding MoveSecurityAttributes DWORD 0 but this registry key does not work as
described.

The only fix I could find was to set up another script to run after the ftp
download script that copies the files into a temporary folder then moves
them back into the original download folder. Why the OS behaves like this
is beyond me, but it does all the same.