Which preposition to use for the reducing agent?
Either is fine.  In the most literal interpretation of the statement I would say by (as it does the actual action of reduction), however I personally would likely use with, to a scientist there is little difference though.  If you were filing a patent, the term might might matter a bit more, which a quick survey of the patent literature suggests with.  Again though this is minutia and nit-picky.

I would suggest phrasing your sentence more as: 


  ...is reduced to sodium phenylselenolate with a solution of NaBH4 in alkaline ethanol .