A subfamily of zinc metalloproteases, represented by Neutral endopeptidase (EC 22.214.171.124) and endothelin-converting enzyme, is involved in the metabolism of a variety of biologically active peptides. Recently, we cloned and characterized a novel member of this metalloprotease family termed soluble secreted endopeptidase (SEP), which hydrolyzes many vasoactive peptides. Here we report that alternative splicing of the mouse SEP gene generates two polypeptides, SEPΔ and SEP. After synthesis, both isoforms are inserted into the endoplasmic reticulum (ER) as type II membrane proteins. SEPΔ then becomes an ER resident, whereas SEP, which differs by only the presence of 23 residues at the beginning of its luminal domain, is proteolytically cleaved by membrane secretase(s) in the ER and transported into the extracellular compartment. An analysis of the chimeric proteins between SEPΔ and bovine endothelin. converting enzyme-1b (bECE-1b) demonstrated that the retention of SEPδ in the ER is mediated by the luminal domain. In addition, the dissection of the chimeric bECE-1b/SEP insertion showed that its insertion domain is obviously responsible for its secretion. A series of mutagenesis in this region revealed that the minimal requirement for cleavage was found to be a WDERTVV motif. Our results suggest that the unique subcellular localization and secretion of SEP proteins provide a novel model of protein trafficking within the secretory pathway.