Numerous membrane proteins are cleaved by tumor necrosis factor-alpha converting enzyme (TACE), which causes the release of their ectodomains. An ADAM (a disintegrin and metalloprotease domain) family member, TACE contains several noncatalytic domains whose roles in ectodomain shedding have yet to be fully resolved. Here, we have explored the function of the transmembrane domain (TM) of TACE by coupling molecular engineering and functional analysis. A TM-free TACE construct that is anchored to the plasma membrane by a glycosylphosphatidylinositol (GPI)-binding polypeptide failed to restore shedding of transforming growth factor-alpha (TGF-alpha), tumor necrosis factor-alpha (TNF-alpha) and L-selectin in cells lacking endogenous TACE activity. Substitution of the TACE TM with that of the prolactin receptor or platelet-derived growth factor receptor (PDGFR) also resulted in severe loss of TGF-alpha shedding, but had no effects on the cleavage of TNF-alpha and L-selectin. Replacement of the TM in TGF-alpha with that of L-selectin enabled TGF-alpha shedding by the TACE mutants carrying the TM of prolactin receptor and PDGFR. Taken together, our observations suggest that anchorage of TACE to the lipid bilayer through a TM is required for efficient cleavage of a broad spectrum of substrates, and that the amino-acid sequence of TACE TM may play a role in regulatory specificity among TACE substrates.