As a level 2 offender, he's required to be registered for life. But being required to register doesn't automatically mean he can't be around children - it only means that the community has a passive right to access that information about him. Restrictions on his movement and who he can associate with is more of a function of his period of probation, so if he's clear of his probation, he shouldn't have additional restrictions for things like who he can socialize around (there will always be restrictions on OTHER aspects of his life, such as types of employment he can accept, etc.).
If you're concerned that he's somehow outside the terms of his probation or in violation of the law, contact law enforcement. They get paid to check out things like this and make sure everything is on the up and up. They're not going to care about him holding his OWN child, but if he's living with someone who makes part of their living caring for the children of OTHERS, they'll want to make sure that the CARETAKER is following any restrictions.

