4L60E VSS Conversion - Tranny Question

[Rat72]

I have a 4L60E behind an LT1 which is in a 4WD setup. When doing the conversion to 4WD you need to move the VSS from the tailhousing into the transmission case. A reluctor wheel is bolted onto the shaft. I've had this setup running for about 8 years with no issues but I had some transmission work done recently and I started getting error code 97 - VSS Circuit Fault. So I figure the sensor has finally gone bad. I pull the sensor which is just a little below the shaft and well above the pan. And tranny fluid starts coming out of the hole.

1) Should there be any transmission fluid in that back part of the tranny?
2) If so should the level be that high?
3) Are reluctor rings and VSS sensors meant to operate with a coating of tranny fluid on them?

Thanks,
Whit