Sheesh, having such a morose figure in nurseries would definitely be disconcerting for kids. No wonder Nina had nightmares about it!
I really like the idea of the NPCs being 'demi-watchers'. The way I understand it, you suggest they're like... folk legends of the Sim World? It would make a lot of sense if they were perceived as this. And I suppose that in a world where magic is a political issue, folk legends get treated more seriously.