Sterol regulatory element-binding proteins (SREBPs) are membrane-bound transcription factors that promote lipid synthesis in animal cells. They are embedded in the membranes of the endoplasmic reticulum (ER) in a helical hairpin orientation and are released from the ER by a two-step proteolytic process. Proteolysis begins when the SREBPs are cleaved at Site-1, which is located at a leucine residue in the middle of the hydrophobic loop in the lumen of the ER. Sterols suppress Site-1 cleavage, apparently by interacting with a polytopic membrane protein designated SREBP cleavage-activating protein (SCAP). SREBPs and SCAP are joined together in ER membranes through interaction of their cytoplasmic COOH-terminal domains. Here we use an in vivo competition assay in transfected cells to show that the SREBP·SCAP complex is essential for Site-1 cleavage. Overexpression of the truncated COOH-terminal domains of either SREBP-2 or SCAP disrupted the complex between full-length SREBP-2 and SCAP as measured by co-immunoprecipitation. This resulted in a complete inhibition of Site-1 cleavage that was restored by concomitant overexpression of full-length SCAP. The transfected COOH-terminal domains also inhibited the transcription of a reporter gene driven by an SRE- containing promoter, and this, too, was restored by overexpression of full- length SCAP. We interpret these data to indicate that the SREBP·SCAP complex directs the Site-1 protease to its target in the lumenal domain of SREBP and that disruption of this complex inactivates the Site-1 cleavage reaction.