Processing of integral membrane proteins in order to liberate active proteins is of exquisite cellular importance. Examples are the processing events that govern sterol regulation, Notch signaling, the unfolded protein response, and APP fragmentation linked to Alzheimer's disease. In these cases, the proteins are thought to be processed by regulated intramembrane proteolysis, involving site-specific, membrane-localized proteases. Here we show that two homologous yeast transcription factors SPT23 and MGA2 are made as dormant ER/nuclear membrane-localized precursors and become activated by a completely different mechanism that involves ubiquitin/proteasome-dependent processing. SPT23 and MGA2 are relatives of mammalian NF-kappaB and control unsaturated fatty acid levels. Intriguingly, proteasome-dependent processing of SPT23 is regulated by fatty acid pools, suggesting that the precursor itself or interacting partners are sensors of membrane composition or fluidity.