That colony wasn’t a member of the Federation, though.
But they have discussions about it in the episode and no one brought up any laws about it. Picard even says he disapproves of it personally but says nothing about it being banned.
One could argue that’s not an augmentation.
From Dr. Bashir, I Presume: "DNA resequencing for any reason other than repairing serious birth defects is illegal."
The Doctor specifically said that many of the modifications Torres wanted to make had nothing to do with the baby's health.
Which actually contradicts a TNG episode where the Federation had an entire research facility dedicated to creating genetically enhanced children with super powers like immunity to disease, telekinesis, and rapid maturity.