Carboxypeptidase E (CPE) functions in the posttranslational processing of peptide hormones and neurotransmitters. Like other peptide processing enzymes, CPE is present in secretory granules in soluble and membrane-associated forms that arise from posttranslational processing of a single precursor, "proCPE." To identify the intracellular site of proCPE processing, the biosynthesis and posttranslational processing were investigated in the mouse anterior pituitary-derived cell line, AtT-20. Following a 15-min pulse with [35S]Met, both soluble and membrane-bound forms of CPE were identified, indicating that the posttranslational processing event that generates these forms of CPE occurs in the endoplasmic reticulum or early Golgi apparatus. The relative proportion of soluble and membrane-bound forms of CPE changed when cells were chased for 2 h at 37 degrees C but was unaffected when cells were chased at either 20 or 15 degrees C, suggesting that further processing of membrane forms to the soluble form occurs in a post-Golgi compartment. Treatment of the cells with chloroquine did not alter the relative distribution of soluble and membrane forms, suggesting that an acidic compartment is not required for this processing event. Overexpression of CPE did not influence the distribution of soluble and membrane forms of CPE, indicating that the CPE-processing enzymes are not rate-limiting. To examine directly CPE-processing enzymes, bovine anterior pituitary secretory vesicles were isolated. An enzyme activity that releases the membrane-bound form of CPE was detected in the purified secretory vesicle membranes. This enzyme, which removes the C-terminal region of CPE, is partially inhibited by EDTA and phenylmethylsulfonyl fluoride and is activated by CaCl2. Together, the data indicate that posttranslational processing of CPE occurs in secretory granules and that this activity may be mediated by a prohormone convertase-like enzyme.