The proteolytic cleavage of sterol regulatory element-binding proteins (SREBPs) is regulated by SREBP cleavage-activating protein (SCAP), which forms complexes with SREBPs in membranes of the endoplasmic reticulum (ER). In sterol-depleted cells, SCAP facilitates cleavage of SREBPs by Site-1 protease, thereby initiating release of active NH(2)-terminal fragments from the ER membrane so that they can enter the nucleus and activate gene expression. In sterol-overloaded cells, the activity of SCAP is blocked, SREBPs remain bound to membranes, and transcription of sterol-regulated genes declines. Here, we provide evidence that sterols act by inhibiting the cycling of SCAP between the ER and Golgi. We use glycosidases, glycosidase inhibitors, and a glycosylation-defective mutant cell line to demonstrate that the N-linked carbohydrates of SCAP are modified by Golgi enzymes in sterol-depleted cells. After modification, SCAP returns to the ER, as indicated by experiments that show that the Golgi-modified forms of SCAP cofractionate with ER membranes on density gradients. In sterol-overloaded cells, the Golgi modifications of SCAP do not occur, apparently because SCAP fails to leave the ER. Golgi modifications of SCAP are restored when sterol-overloaded cells are treated with brefeldin A, which causes Golgi enzymes to translocate to the ER. These studies suggest that sterols regulate the cleavage of SREBPs by modulating the ability of SCAP to transport SREBPs to a post-ER compartment that houses active Site-1 protease.