Re: boy touching boy
I would not let this child play with your son without complete supervision by you or your husband. I would actually go one step further and not let your son play with this boy at all.
I would then sit your child down and firmly, but gently explain that this is bad touching, and nobody should touch him there, and if they do, he must tell you. Sounds like the perfect time to teach your three year old too.
I would not go so far as to get protective services involved, because you don't know exactly what happened.
About 15 years ago, my son was playing with a neighbor ( he was 4), and something similar happened. We just agreed to never let them together again, and I am happy to say that my son is a healthy happy teenager, with no memory of the incident. The other kid is a juvenile delinquent.
I wish you well...