If I remember right, and I probably don’t because I’m horrible at history, after Princess Celestia banished Princess Luna to the moon she wasn’t the only pony upset. The law was put into place to try and lift spirits. There isn’t really a penalty for ignoring it, but there’s a huge tax break for those that abide by it.

It’s based upon a number of puns per year, but a certain number of those puns have to be different and spaced out over a certain number of days. You can’t just say the same thing over and over again on the last day (that day always being your birthday).

It’s not really enforced, it’s just sort of tradition at this point. Even if somepony accuses somepony else of ignoring the law, there has to be pretty sizable evidence to prove it.

That or the defendant has to be stupid enough to plead guilty.