I'm not an attorney.
However, DMCA has certain safe harbor provisions. You must provide a means for copyright owners or others who allege a user has uploaded illegal material to contact you regarding the material. Generally, this means a mailing address.
You are not liable if you did not know about the material (you aren't required to "police" your site), or if you remove the material within 7 (or 10, I forget...again not an attorney) days from receiving an authentic complaint. Safe harbor does NOT apply if you actively conspire to profit from illegal material.
A) Prohibits illegal material including certain obscenities, copyright infringement, brand dilution, advocating violence, etc.
[EDIT: There's nothing particularly unique about allowing a subdomain vs. allowing any user generated content. The exception here is cybersquatting laws. You should include a statement in the terms that prohibit cybersquatting and trying to acquire subdomains in bad faith (i.e. google.example.com and then trying to sell the address to Google).]