My 2000 Velocity 280 with 502 mpi won't go over 3500 rpms !?! Any suggestions ???

Dump/replace your water separator, if that does not do it one of your fuel pumps may be shot.

I had a bad fuel pressure regulator that caused the same issue on my 454 mpi

have it scanned , going into guardian mode

mefi 3 does not have power reduction mode. 1999 thru 2001 for Mercruiser OEM stock was MEFI 3

The very early MEFI 1 had power reduction mode.

Going to need some more details and post your engine serial # (that was for you....BUP )
Does it run fine and just hit a wall at 3500 or miss/studder/stall?? In neutral and under a load???
Anything you changed?? What did it run before?? When was the last time you ran it before this happened??

I would start with fuel pressure checks all the way thru the rpms. Possible cap and rotor and spark plugs along with wires change. Verify strong spark on all 8.

condition of prop and correct pitch and not repaired by a sub par prop shop. Can not tell you how many times I see SS prop repairs by hack prop shops and the boat lost 200 to 500 rpms. But in your case thats alot of RPMs like 1500 so IMO your issues are possible fuel delivery and or ignition related or possible internal components ie: compression and or so forth.

While sparks plugs are out -- Do a compression test.

Scan engine and fuel pressure checks is the first to do's. Then condition of all ignition components and lastly possible FUEL INJECTORS need to be tested and flow tested along with cleaned.