The state of New Jersey has settled a securities fraud lawsuit brought by the Securities and Exchange Commission, which accused it of selling $26 billion in municipal bonds without proper disclosures about the state’s financial health.

The suit, which was filed and settled on Wednesday, is the first one of its kind that regulator has ever brought against a state.

The action is evidence that regulators are increasing their scrutiny of the $2.8-trillion municipal bond market, over which the SEC does not wield ($) a great deal of regulatory authority, as The Wall Street Journal has noted. (What are municipal bonds? Glad you asked.)

As things stand, the SEC can pursue violations of securities laws, as happened with New Jersey. And it can regulate underwriters and sellers of municipal securities, requiring them to demand certain disclosure from issuers.

But that means it "can only impose regulations through the back door," says Theresa Gabaldon, a George Washington University Law School professor. "It's pretty toothless and is a long way from the SEC being able to say, 'Hey, you issuers, you have to make specific disclosures.'"

The SEC in this case alleged that New Jersey didn’t disclose to muni-bond buyers that, because of financial difficulty, it would be under-funding its two largest pension plans: the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System.

Here’s how the SEC explains New Jersey’s violations in a cease-and-desist order released Wednesday (Read the full report):

The State’s misrepresentations and omissions were material in that they failed, over the course of an almost six-year period, to provide investors with adequate information regarding the State’s funding of TPAF and PERS as well as the financial condition of the pension plans. Information regarding the State’s under funding of TPAF and PERS and their financial health was important to investors in evaluating New Jersey’s overall financial condition and future financial prospects.

The state has neither admitted nor denied the charges. A spokesman for the New Jersey Treasury Department told the Financial Times: “New Jersey has never failed to make a bond payment and never will. The state of New Jersey aims to have the best bond disclosure in the nation and we will continue to work to achieve that goal.”

Given that the bonds in question were sold from 2001 through 2007, the SEC's order amounts only to a warning not to make such misstatements in the offering documents for future muni-bond sales. The state does not face any fines, which according to the Financial Times is “not unusual in such cases, where any bill would fall directly on taxpayers.” Some are still raising eyebrows, however, about the lack of accountability for the public officials who approved the misleading disclosures.

“Yes, they charged the State of New Jersey with fraud, but there’s no price paid here,” Lynn Turner, former chief accountant for the SEC, told The New York Times. “There’s no fine, and no accountability on the part of any individuals.”

The New York Times also pointed out that in addition to fact that no individuals were named in the suit, the SEC also didn’t go after the bond’s underwriters — the ones “whose job it was to vouch for the state’s financial statements.” The Times listed some of the largest used by New Jersey during the period in question: “Citigroup, J.P. Morgan Securities, Morgan Stanley, Bank of America, Merrill Lynch, Goldman Sachs and Barclays Capital.”

Given the dire financial straits that states and municipalities across the country are in, in recent months investors have grown increasinglyconscious of vulnerabilities in the market. The SEC in January created a unit within its enforcement division devoted to investigating misconduct in the municipal securities market in connection with public pension funds — signaling that while New Jersey may be the first state to be charged with securities fraud, it likely won't be the last.