Is this a professional/faculty director, or a student?
I think that is to be considered here wen evaluating the situation.
I had a possible potentiality for sexual harrassement issue that came up last year and the actor and I discussed how she was dealing with it and the steps we would take if it reached a point where she felt substantially uncomfortable and wanted him talked to.
When I discussed it with my advisor, she was quick to note that in professional theater, more often than not, this may very well have passed quickly out of the SMs hands already (all you professionals out there please would love your two cents on this one!), because at that point you're dealing with a legal issue of harrassment. THankfully it never went that far and I didnt have to talk to anyone. BUT, I think this may be a similar situation in that it's a learning environment even if you are trying to run it professionally, and there are things that need to be taken in to account. I don't know that I drew conclusions that will help you to take action either way, but perhaps I've broadened the scope a bit? I don' tknow... I just had my wisdom teeth out this morning so I feel inclined to say a lot online, given that my mouth is stuffed full of cotton

heheh... anyhow good luck with this, and wish the sm luck - it sounds like a challenge, but hopefully a manageable one. I think you should not be afraid to seek imput from the higherups though, esp in a university situation where we are learning how to navigate this relationship. If it's a guest director though, I really think that changes stuff quite a bit. They should know what they're doing enough to not offend, at least not be offensive past tthe point of being constructive (that might exist-- i dont know- giving someone motivation for a scene/monologue)
Oh look at my groggy self rambling more. :-)