It would be helpful to ensure that he does not succeed in actually reaching inside her blouse if possible.
Gently redirecting him is a good idea because he should not experience fear or shame as a toddler at this age is still exploring different things (including others reaction to his behavior) His mom may decide to place him in time out for a few minutes and after that speak to him about what is a good and what is a bad touch.
She could educate him about people's bodies and think of some sort of a reward when he exhibits the desired behavior. It would help to let him know ahead of time that if he can go a day without doing this, he can get a reward at the end (whatever he finds rewarding- extra play time, a snack, a sticker, having her read him a story at bed time, etc) Mom will have to remain consistent in reinforcing the desired behavior with him until he becomes used to it.
Good Touch Bad Touch: Learning About Proper and Improper Touches
My Body Is Private (Albert Whitman Prairie Books)
He may be associating his touch of her breast as a way to soothe/relax himself. She may get him a couple of small soft squeeze balls that she could encourage him to use. While he is crying after she's halted his behavior, she can place him in time out and let him know that after he comes out of it he could use the relaxation balls for a few minutes. That can be seen as a reward.
I would like to offer a different perspective.
Unfortunately, this young lad has developed a long-standing behavior pattern. It will take patience, teaching, and consistency to change this. Because he is only 3 1/2 he will have a limited ability to listen to reason and he also has a fairly short attention span. So...consistency will be a key just as Dr. Rossi noted.
The issue with the breast grabbing is not about a naughty boy or a boy who is trying to break boundaries. It is a about a boy who has learned that the way to get his emotional needs met is by touching mom's breasts as they represent support, nurturance, love, intimacy. When his hand is taken away and his needs have to go unfulfilled - he yells like the dickens. That only makes sense! The one guaranteed way he knows of being comforted is by those breasts and now he can't touch them. It's a dilemma for him.
So...at some point in his little life he came to believe that mom's breasts were his property..and they served several important purposes for him...food, comfort, love. And...while breast feeding he certainly had free access to them. So..partly what needs to happen is that access needs to be denied. To start, Mom needs to wear clothing that makes access darn near impossible. A zippered shirt or jacket may work...or a pullover top that is tucked into pants...anything that makes access difficult.
This is road-block #1.
Mom needs to talk to her little breast-hugging lad about privacy and parts of the body. The book Dr. Rossi referenced (My body is private) is too sophisticated for a 3 1/2 year old. If you can't find one more appropriate to his age...then make up a story based on other references. Due to his attention span, this story/book should be presented often so as to reinforce body boundaries.
This is road-block #2.
What this young boy is seeking - as I stated earlier - when he reaches for mom's breast is comfort, support, nurturance, and familiarity. So those needs should be addressed in a more healthy manner. Holding him, rocking him, kissing him, cuddling...these are healthy replacements. So when he reaches for mom's breast she can say, "I see you want to be near me, let me hold you tightly" or "I see that you would love to be rocked. Come here in my arms". This way you are teaching him to connect his emotions with his behaviors ... and at the same time teaching him what behaviors are appropriate.
I agree with Dr. Rossi that you should not shame or punish him. This young boy has emotional needs and they need to be attended to....what he has been doing to get those needs met is, as I wrote earlier, inappropriate. So giving him a time-out is not going to work. It doesn't solve the issue - in fact it only makes it worse. Rather...he needs to be taught how to get comfort, nurturance, love in more appropriate and healthier ways. And, these healthy and appropriate ways need to be reinforced until they become go-to strategies for him. (Right now mom's breasts are the go-to place).
It will also be important to put words to all of this. So...when he reaches for the breast...mom reinforces that his need is for comfort or love. Then when she rocks him or cuddles..she states that she is meeting his need for love...and so forth. As he is building his vocabulary...it is important that he learns the language of emotions.
I hope you find my perspective helpful to you.
I would be happy to chat if you would like to discuss this more.