In Moodle 1.9 it's here: Administration ► Appearance ► HTML editor
Joseph gets the prize! Emoticons are under "HTML editor," not "HTML settings" in 1.9. That's a really nice feature - once you find it. Hmm - I wonder if info can be added to the "alt" attribute in the tag for the image so these emoticons can be made accessible to students with disabilities? (a screen reader would say "Smiley face" or "Thumbs up").
I should have been able to find it on my own, but my mother always did say - still does say - that I "have bananas in front of my eyes."