Oxysterol-binding protein (OSBP) binds oxysterols, but the exact function of this interaction has remained elusive. Disruption of the OSBP gene in mice is embryonic-lethal at the four-cell stage. Because cholesterol is required for the assembly of an oligomeric phosphatase complex that has dual specific activity for the inactive phosphorylated kinase pERK, lowering cellular cholesterol levels leads to the hyperactivation of ERK1 and ERK2. Wang et al. identify OSBP as the molecule that holds the phosphatase complex together and show that it uses bound cholesterol as a cofactor during assembly. Surprisingly, oxysterols actually stimulate disassembly of the oligomeric phosphatase. Thus, cholesterol functions outside the lipid bilayer in regulating the activity levels of a key signaling component, and other lipids might regulate the assembly of other multiprotein signaling complexes in a similar fashion.