In Drosophila, transposon-silencing piRNAs are derived from heterochromatic clusters and a subset of euchromatic transposon insertions, which are transcribed from internal non-canonical initiation sites and flanking canonical promoters. Rhino binds to Deadlock, which recruits TRF2 to promote non-canonical transcription of these loci. Cuff co-localizes with Rhino and Del. The role of Cuff is less well understood, but the cuff gene shows hallmarks of adaptive evolution, which frequently targets functional interactions within host defense systems. We show that Drosophila simulans cuff is a dominant negative allele when expressed in Drosophila melanogaster, where it traps Deadlock, TRF2 and the transcriptional co-repressor CtBP in stable nuclear complexes. Cuff promotes Rhino and Deadlock localization, driving non-canonical transcription. CtBP, by contrast, suppresses canonical cluster and transposon transcription, which interferes with downstream non-canonical transcription and piRNA production. Cuff, TRF2 and CtBP thus form a network that balances canonical and non-canonical piRNA precursor transcription.