We call those 'cigarette burns'...erm...yeah, that's a problem with the transfer from film. Aside from masking it out in the editor, I'm not aware of any solution for that.
And yes, that is rainbowing. I'd use DFMDeRainbow and LUTDeRainbow in tandem; that combo eradicated virtually - if not all - of the rainbows on AnimeEigo's original Oh My Goddess! OVA discs with just the defaults, but those discs are kind of the textbook model for horrendous rainbowing. Just be aware that A) they should be placed before any IVTC operations*, and 2) they will royally slow down the script, far more than each one individually would.
*It is best if the derainbowing comes before IVTC, but if I remember correctly, due to the way the filters act, it is pretty safe to use DFMDeRainbow afterword. So you could essentially run two passes - LUT+IVTC first, and then a second with DFM. Obviously works better if you're using HuffYUV clips instead of scripts in the editing program.