Pseudozyma flocculosa is related to the model plant pathogen Ustilago maydis yet is not a phytopathogen but rather a biocontrol agent of powdery mildews; this relationship makes it unique for the study of the evolution of plant pathogenicity factors. The P. flocculosa genome of ~23 Mb includes 6877 predicted protein coding genes. Genome features, including hallmarks of pathogenicity, are very similar in P. flocculosa and U. maydis, Sporisorium reilianum, and Ustilago hordei. Furthermore, P. flocculosa, a strict anamorph, revealed conserved and seemingly intact mating-type and meiosis loci typical of Ustilaginales. By contrast, we observed the loss of a specific subset of candidate secreted effector proteins reported to influence virulence in U. maydis as the singular divergence that could explain its nonpathogenic nature. These results suggest that P. flocculosa could have once been a virulent smut fungus that lost the specific effectors necessary for host compatibility. Interestingly, the biocontrol agent appears to have acquired genes encoding secreted proteins not found in the compared Ustilaginales, including necrosis-inducing-Phytophthora-protein- and Lysin-motif- containing proteins believed to have direct relevance to its lifestyle. The genome sequence should contribute to new insights into the subtle genetic differences that can lead to drastic changes in fungal pathogen lifestyles.