Omg you need to get your daughter out of that sick situation NOW!

Reading this filled me with a rage.

They'd be cleaning up the chunks of any person who sexually assaulted my little girl.

Think about the movie "law abiding citizen".

DH needs swift kick and to get his head out of the sand. This is something he should not be ignoring. He is letting his oldest child abuse his youngest. Ignoring what is happening will not make it go away.

This is a very hard situation to deal with. As a start if DH has joint legal custody, he can talk to his child's pediatrician, explain what is happening in his home, and ask for a referral for services. 

This is one time, I would say, that disengagement is not the path for you. You are going to have to actively engage to get DH to realize that not saying anything is not the correct course of action.

Honestly, I'm not sure how this is even a question of "what should I do?".  You protect your child by any means necessary. The skid is acting out sexually with your three-year-old. Keep that child away from yours at all times.

Is your child your husbands? If so, why isn't he protecting your shared child? My formerSO would not protect our shared baby from his son. I left with our baby; it absolutely was necessary for his well-being and I suggest you do the same if nothing is going to be done to get your husband's kid the help he clearly needs. 

Having recently dealt with a similar issue between my teen stepson and my 4 year old DS, I feel anxious for you and am so sorry that you are dealing with this. This is not healthy, normal child behavior, and your SS is learning it from somewhere.

I would recommend taking your 3 year old DD to her pediatrician immediately. Tell them what is going on. They will likely talk to her privately, and may ask to examine her (with you present). They will also likely file a CPS report. You must do this in order to start a paper trail, ESPECIALLY given that your DH is not responding with an expected degree of concern.

If your husband does not get on board with keeping your SS away from DD3, then you will need to alert CPS to this fact as well. It will fall under the category of parental neglect. If you do not protect DD3 from SS, you could also be punished for the same reason (although it doesn't sound like you are wililing to shy away from this).

Is DD3 able to talk about what is happening with SS?

How did you learn that he's been making your 3 year old grind on him?  Did you see it?  Did your DD tell you?  Is this a one time occurrence or something that happens frequently?

I would most definitely have DD checked to make sure there's nothing else going on.  And if she told you about this, I would have the pediatrician talk to her as well and have a report made.  If your husband is not already all over this, then you need to have someone involved who will be - a CPS report will force your husband into action.  In the meantime, I would not allow the two children to be together unless YOU (not your husband) are there to supervise them.  And if all of that does not result in the SS not being around your DD (i.e., your husband and BM agreeing that BM will keep SS for now and your husband will see SS outside of the house), my inclination would be to leave to protect my child.  

But definitely document!  You will need it.

I agree with everyone else on here - you need to take action right now and get your child out of that toxic situation if it really is as bad as it sounds.  I would investigate first to see what is really going on (because I'm not sure how you know what's going on- if you saw it, it was told to you, etc.); just to find out why its happening, whos provoking it, how many times its happening, etc.

In the meantime, I would make sure your child has NO unsupervised interaction- however much she is able to stay with you or people you trust, the better. 

  I used to teach GED classes to adults part time, and there was one student that stood out to me- her biological son was being sexually abused by his half sisters when he went to his Dads house, until he was old enough to speak up and told his Mom.  It affected him severely throughout his young years, and that mom, who was trying to get her degree, was miserable, eventually dropped out, and is constantly in doctors appointments, therapy appointments, etc. with her son who also now has severe psychological and behavioral issues. 

Don't let this happen to you, and don't think that your child may be too young to remember, etc. etc.  Be proactive, because you are the one she relies on to protect her. 

Document, document, document.  Report, report, report.  You need to start a trail and promote awareness, don't just talk to your husband about it, don't just talk here about it. 

Wishing you and your daughter the best.