Strange that a Head Coach would let the assistant dominate the decision on positional playing time, but coaches can be strange creatures!
1. As a sophomore setter, there is still a lot of time in the recruiting process. Setters will tend to get 'recruited' a bit later, as college coaches are tripping over themselves to recruit OH's first, second and third.
2. If she is not on the court setting during tournaments, then she will not be 'seen' as much by college coaches. The 16's year (or sophomore year in HS) is the evaluation year for all positions. Many CCC's (crazy college coaches) will mark freshman for entry into their recruiting databases, and there are a few freshman which are very gifted athletically, but the sophomore year is the main evaluation year. For hitters, this is becoming the main year for ramping up the 'active' recruiting, but for setters (unless they are just studs), their main recruiting year tends to still lean towards the 17's to 18's years.
3. As you are paying club volleyball membership, you have the right to express your thoughts about the opportunities available for your daughter. I do think it is a valid point that her court time is being reduced for another player who is one year younger, thus has one more year of upcoming recruiting. I would approach the head coach, and calmly express your thoughts about the situation, your observations and what you would like to see as a solution.
4. The other player has the right to play also, as she is paying club dues, but if your daughter is at a higher skill level and older, then logically, she should be on the court more often and at more appropriate recruiting time. Consider asking them to put forth some type of playing time formula or game plan, so everybody is OK. Say something like your daughter sets in 75% of the competition (3 out of 4 games) - this allows her exposure, but also allows the other setter to get touches.
5. If they don't agree, or it becomes adversarial, then just stay positive, encourage your daughter to play her best at all times, and keep reaching out to collegiate programs to market your daughter (or employ a Recruiting Service; NCSA is the one to pick by the way, via my site!).
6. Then, pick a club for her 17's year which will commit to her being on the court at least 75% of the time because this is the key evaluation/recruiting year for setters. Again, as you are paying $ to play, you have the right to ask for certain concessions or understandings. There is absolutely no problems with asking that your PSA setter sets the team the majority of the time, provided she has the talent to back up that request.
In closing, communicate with your coach in a low key manner, encourage your daughter to stay positive and work hard, reach out to collegiate programs and then make a very concise club decision for her 17's year.