Deubiquitinating enzymes (DUBs) regulate various cellular processes ranging from protein degradation to cellular signaling. USP19, the only DUB containing a carboxyl-terminal transmembrane domain, was proposed to function in endoplasmic reticulum-associated degradation (ERAD). Here we characterize the function and regulation of USP19. We identify Hsp90 as a specific partner that binds the catalytic domain of USP19 to promote substrate association. Intriguingly, although overexpressed USP19 interacts with Derlin-1 and other ERAD machinery factors in the membrane, endogenous USP19 is mostly in the cytosol where it binds Hsp90. Accordingly, we detect neither interaction of endogenous USP19 with Derlin-1 nor significant effect on ERAD by USP19 depletion. The USP19 transmembrane domain appears to be partially stabilized in the cytosol by an interaction with its own catalytic domain, resulting in auto-inhibition of its deubiquitinating activity. These results clarify the role of USP19 in ERAD and suggest a novel DUB regulation that involves chaperone association and membrane integration. Moreover, our study indicates that the localization of tail-anchored membrane proteins can be subject to regulation in cells.