Background: I am a former department chair at a large university, and also served for several years on my university’s conflicts of interest committee.
The situation you are describing can indeed reasonably be categorized as a type of conflict of interest, specifically one involving nepotism, but it is not your conflict of interest; rather, it is the department chair who will be said to be in a conflict of interest, or at least a potential conflict of interest, in this situation.
Moreover, this is a relatively weak or indirect sort of conflict, in the sense that between the holder of power (the chair) and the family member whom they might be inclined to favor (the son/daughter) there is at least one intermediary level of decision makers (you, the instructor). This makes it less likely for nepotism to occur, but does not altogether eliminate the possibility for it.
I found one US university that covers this situation in its policy on nepotism. The University of Minnesota defines a class of situations that are considered prohibited nepotism conflicts, and another class of situations that are considered potential nepotism conflicts. Your situation falls into the latter class, precisely because of this indirectness I mentioned above, see this quote (bold formatting added by me for clarity):
Nepotism is a prohibited conflict of interest that occurs when:
- a University member directly influences the University employment (e.g., hiring, promotion, supervision, evaluation, and determination of salary) or academic progress (e.g., grading and advising) of a University member with whom they have a personal relationship (e.g., a relative, romantic or business partner, or close personal friend); or […]
The following are examples of nepotism:
- when an instructor grades the work of an individual with whom the instructor has a personal relationship;
Potential nepotism situations occur when University members in a personal relationship interact in their University roles in a manner that does not constitute nepotism, but that gives rise to a reasonable possibility or perception that nepotism may occur. Examples of potential nepotism situations include:
- when a parent faculty member and child student are members of the same academic department and: 1) the parent faculty member does not currently advise, instruct, or evaluate the child student, but reasonably could do so in the future; or 2) the parent faculty member’s status or relationships with other department members are reasonably likely to influence, or be perceived to influence, those department members to provide favorable treatment to the child student.
Despite making the distinction between nepotism and potential nepotism, the policy goes on to say that both of them must be treated in the same way:
These and other potential nepotism situations do not constitute a prohibited conflict of interest. However, to prevent prohibited conflicts of interest from occurring in the future, and to prevent the perception that a prohibited conflict of interest exists, potential nepotism situations must be addressed in the same manner as nepotism.
The policy then refers to a companion procedure document that explains how these sorts of situations need to be addressed. You can look up the details in the link, but I’ll emphasize one important point that touches on a surprising and counterintuitive aspect of conflicts of interest: in academia, conflicts of interest are not considered an absolutely unethical thing that must be avoided at all costs. Of course it’s good to avoid them when it is practical to do so, but at other times, the discussion will be about how to mitigate or manage the conflict. This is the case here: your situation certainly warrants a healthy dose of caution and awareness on the part of the involved parties, and compliance with university policy and fairly obvious ethical principles. But, since you ask about the ethics, I wouldn’t say that the situation (based on the few specific details you described) is necessarily evidence of any unethical behavior.