The developmental accumulation of proliferative germ cells in the C. elegans hermaphrodite is sensitive to the organismal environment. Previously, we found that the TGFβ signaling pathway links the environment and proliferative germ cell accumulation. Neuronal DAF-7/TGFβ causes a DAF-1/TGFβR signaling cascade in the gonadal distal tip cell (DTC), the germline stem cell niche, where it negatively regulates a DAF-3 SMAD and DAF-5 Sno-Ski. LAG-2, a founding DSL ligand family member, is produced in the DTC and activates the GLP-1/Notch receptor on adjacent germ cells to maintain germline stem cell fate. Here, we show that DAF-7/TGFβ signaling promotes expression of lag-2 in the DTC in a daf-3-dependent manner. Using ChIP and one-hybrid assays, we find evidence for direct interaction between DAF-3 and the lag-2 promoter. We further identify a 25 bp DAF-3 binding element required for the DTC lag-2 reporter response to the environment and to DAF-7/TGFβ signaling. Our results implicate DAF-3 repressor complex activity as a key molecular mechanism whereby the environment influences DSL ligand expression in the niche to modulate developmental expansion of the germline stem cell pool.