I appreciate that Karma and pixi respected your brother's wishes in what to expose his child too.
Why do your brother and his wife want you, Karma, and pixi involved in this discussion with their daughter? I know you said so she sees you're all on the same page, but what exactly does that mean? You're all on the same page in what way? In that you all agree as to what's going on or what this arrangement is or what to call it? That all the adults involved agree to it or approve of it?
I'll be honest, I see what to tell her as really something her parents ought to be deciding. But why not simply say, "She's a good friend?" It's not really important to a 4 year old to know that she's his 'girlfriend.'