FFF
In class G or D IFR traffic is not separated from VFR, however I suspect you are correct. Over controlling is an issue I have come across occasionally, when I cancel IFR to expedite but a controller still tries to give separation where I can see perfectly well!
Bringing us back from the thread creep, the response should therefore have been "unable, maintaining 1x00 feet to remain VMC". Was the ATC instruction given correctly then? Should terminology be changed, as it sounds like an instruction to an aircraft that should not have been subject to a mandatory instruction?