Intramembrane proteolysis governs many cellular control processes, but little is known about how intramembrane proteases are regulated. iRhoms are a conserved subfamily of proteins related to rhomboid intramembrane serine proteases that lack key catalytic residues. We have used a combination of genetics and cell biology to determine that these "pseudoproteases" inhibit rhomboid-dependent signaling by the epidermal growth factor receptor pathway in Drosophila, thereby regulating sleep. iRhoms prevent the cleavage of potential rhomboid substrates by promoting their destabilization by endoplasmic reticulum (ER)-associated degradation; this mechanism has been conserved in mammalian cells. The exploitation of the intrinsic quality control machinery of the ER represents a new mode of regulation of intercellular signaling. Inactive cognates of enzymes are common, but their functions are mostly unclear; our data indicate that pseudoenzymes can readily evolve into regulatory proteins, suggesting that this may be a significant evolutionary mechanism.