It used to be the case that only 2 button pads were supported, but 3-button pad support was added to the docking station framework some time ago.
I also believe, though I'm not 100% sure, that it's possible to read three buttons from the C64 game port - but only if a gamepad's wired a specific way. (Amiga pads on the docking station pull pins 5 and 9 low for button 2 + 3 ; to work on the C64's game port they would have to pull those lines high instead... I think.)
It's true, however, that genuine Sega and CD32 pads aren't supported at all on the Chameleon, because the DB9s on the docking station are strictly unidirectional. If memory serves, this was the reason the Megadrive core's original author abandoned the project.